3. Read the following article regarding Cap and Trade policies. http://online.ws

Question

3. Read the following article regarding Cap and Trade policies. http://online.wsj.com/article/SB10001424052702304620304575165843688369042.html?mod=WSJ_hpp_sections_news a. What is a good or service market that might be affected limiting pollution via the cap and trade policy as described in the article? Explain. [For simplicity, do not choose “jobs” or employment. Choose a good or service that would have its supply or demand affected by the cap and trade policy.] b. Which of the shifters that shift either supply or demand (SPEND or PYNTE) does a Cap and Trade policy affect in the market you chose in Part (a)? Which curve (supply or demand) would shift in response to the policy? Will it increase or decrease? c. Draw a supply and demand graph. Start with an initial equilibrium like you see on Slide #25 in the Attend section. Shift the curve in the direction that you chose in the previous section. Find the new equilibrium. (You do not need to turn in your graph. It is for your own use.) Did equilibrium price increase or decrease? Did equilibrium quantity increase or decrease?

Explanation / Answer

Cap and trade is the most environmentally and economically sensible approach to controlling greenhouse gas emissions, the primary driver of global warming.

The “cap” sets a limit on emissions, which is lowered over time to reduce the amount of pollutants released into the atmosphere.

The “trade” creates a market for carbon allowances, helping companies innovate in order to meet, or come in under, their allocated limit. The less they emit, the less they pay, so it is in their economic incentive to pollute less.

A cap: The only sure way to limit pollution

A cap sets a maximum allowable level of pollution and penalizes companies that exceed their emission allowance. No other system can guarantee to lower emissions.

Trading: Leads to investment and innovation

Some companies will find it easy to reduce their pollution to match their number of permits; others may find it more difficult. Trading lets companies buy and sell allowances, leading to more cost-effective pollution cuts, and incentive to invest in cleaner technology.

Unlike with some pollutants, all CO2 goes into the upper atmosphere and has a global — not local — effect. So it doesn’t matter whether the factory making the emission cuts is in Boston, Baton Rouge, or Berlin, it reduces global emissions.

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