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Two approaches to pricing pollution

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In comparison is the commonly used Cap and Trade method with an alternative and novel method for pricing pollution: The aim was to conduct a practical approach to clarify advantages and challenges of the respective mechanisms. Shortly, the report promotes:1) Levying a Fee which is sufficiently high and adjusted sufficiently often for a Fee 2) Letting the Futures Market and other hedging and insurance instruments indicate the price (the average abatement cost) which can be levied without harming the economy. 3) Securing a repayment of a sufficiently large fraction of the revenue from the Fee. These three parts or components are all essential to the mechanism. Still, key questions remain unanswered in this report. This project was launched by the Working Group for SCP (HKP) in collaboration with the Working Group on Environment and Economy (MEG) under the Nordic Council of Ministers.

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Summary

The report analyses economic mechanism for pricing pollution in a practical setting. Based on a set of criteria (efficiency, transaction cost, acceptability and others) the analysis compares of proposed flexible emission fees and tradable emission permits. The aim is to clarify advantages and challenges of the respective mechanisms that are important in the practical process of the regulator deciding what regulation to impose on polluters. Tradable emission permits are well described and broadly used. However, the application has not been without difficulties, which is the current case for the permits-based European Emission Trading System for CO2. In the analysis, tradable emission permits are included as a mean to highlight differentiators of the flexible emission fee mechanism.

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