When there is more than one company, it gets morecomplex. Two firms have two different marginal reduction costs. The green company has low emission reductioncosts as it has more eco-friendly plants. It increases from left to right withabatement only a little. The blue firm has older plants and high costs ofabatement.
They go from right to the left side with the reduction. The totalwidth has to be achieved to get to the e* level. The blue point where bothlines cross, is called “equimarginal principle”1 and the result for economic efficiency. The sum ofcosts for getting to the e* level are C+G+K. This states that the company withlow marginal abatement costs should decrease its emissions more than the otherone.2Setting up a carbon tax equal for all firms on themarket, they would notice that reducing emissions is cheaper as long as theabatement costs are lower than taxes. The blue line firm would choose abatementand pay costs K as well as taxes B+C+F+G. The green line company would payabatement costs of C+G and additionally pay taxes J+K.
Even though the e* levelis being achieved, the companies would pay lower costs C+G+K and give a lot of moneyB+C+F+G+J+K to the government in form of taxes.3 Having a cap-and-trade system, both firs receive allowancesto pollute a unit of carbon. Playing fairly, each company received the sameamount of allowances – “cap” line. The green line firm has reduction costs ofC. The blue one has to pay D+F+G+K for abatement.4 At some time, the blue firm will buy rather anallowance than pay huge costs. It will notice that they are paying more forabatement than the other company.
The blue firm could offer a trade. The blueline is standing for the demand curve for allowances whereas the green onemarks the supply. Between both lines, a price for the allowance will benegotiated by both companies. In a competitive market, the price will be equalto the tax. Trading allowances reduces the abatement costs by D+F.
The e* levelcan be achieved and the costs of reduction – C+G+K – can be minimized.5 Concluding the comparison, both system attain the sameefficiency level by receiving the optimal level of emission reduction at thelowest cost. The difference in both options is here the impact of distribution.In a carbon cap-and-trade system, the costs for the facilities, industries orfirms are lower.
The government receives in a carbon tax system more revenues.6One should add, that in both cases, companies also have the motivation toreduce their marginal costs of abatement by investing in new technology.Furthermore, the government could use the revenues of taxes and allowances toimprove other issues and reduce costs in other sectors. Lastly, auctions in acap-and-trade system are seen as substitution for trading but give companieswith higher abatement costs an enticement to bid more.
76.2 Carbon Price FloorThe idea of the carbonprice floor was introduced by the UK Government and implemented in 2013.8If prices drop below a certain level, member states can legislate a tax to keepprice at this level.9 The goal is to encourage companies to convertto low carbon economy. Opinions regarding the Carbon Price Floor (CPF) vary.Some say that CPF hos not lead to emission reduction and lead to higher costsfor tax-payers.
Others support the Carbon Price Floor as it encouragesinvestment in low-carbon. The European Commission considered this measurementbut in the end rejected it.106.3 Limited EUAsRelocating and distributingcertificates for emissions is not helping the environment, trading does.11Instead of allocating allowances, the number of certificates should be limitedfor companies with huge contaminations to enforce investments.121.
SummaryThebasic idea behind this system is simple and reasonable, but the theory isalways easier than in practice. Nevertheless, the system is in a permanentdevelopment and optimization. As the government and commission learn frommistakes, the reforms taken in the new periods are based on mistakes which canbe avoided.
Generally said, even though some countries introduced similarsystems, to help the environment, much more participating states are needed.Also the gap between industrialized and developing countries is too big.Countries which are less developed won’t see any sense in changing theirbehavior regarding pollution.
The EU ETS has a good intention with achievingcertain goals and helping the environment. Based on the Kyoto Protocol andCap-and-Trade system, the EU ETS has good aspects and contents but theimplementation reveals gaps which have to be corrected in order to have afunctioning economical system in the European Union and to help the environmentby reducing CO2 and other GHG efficiently.1 Ibid.
2 cf. Haab and Whitehead, “ECON 101: Carbon Tax vs. Cap-and-Trade”.
3 cf. Ibid.4 cf. Ibid.5 cf. Haab and Whitehead, “ECON 101: Carbon Tax vs.
Cap-and-Trade”.6 cf. Ibid.7 cf. Ibid.8 cf.David Hirst and Matthew Keep, “CarbonPrice Floor (CPF) and the price support mechanism,” January 8, 2018, parliament.uk/ResearchBriefing/Summary/SN05927>accessed January 13, 2018.9 cf. Presentationfrom Lecture on November 10, 2017.10 cf. Hirstand Keep, “Carbon Price Floor (CPF) andthe price support mechanism”. 11 cf.Presentation from Lecture on November 10, 2017.12 cf. Presentationfrom Lecture on November 10, 2017.
parliament.uk/ResearchBriefing/Summary/SN05927>accessed January 13, 2018.9 cf.
Presentationfrom Lecture on November 10, 2017.10 cf. Hirstand Keep, “Carbon Price Floor (CPF) andthe price support mechanism”. 11 cf.Presentation from Lecture on November 10, 2017.12 cf. Presentationfrom Lecture on November 10, 2017.