From the WSJ Economics Micro Weekly Review:
EPA Set to Unveil Climate Proposal
by: Amy Harder
May 27, 2014
TOPICS: Environmental Regulation
SUMMARY: The Obama administration will unveil a proposed rule aimed at allowing states to use cap-and-trade systems, renewable energy and other measures to meet aggressive goals for reducing carbon emissions by existing power plants. "The proposal is designed to give states, which will administer the regulations, flexibility to meet the benchmarks.... Central to the strategy of flexibility: the option to include a cap-and-trade component where a limit is set on emissions and companies can trade allowances or credits for emissions as a way of staying under different benchmarks the EPA sets for each state. Power-plant operators could trade emissions credits or use other offsets in the power sector, such as renewable energy or energy-efficiency programs, to meet the target."
CLASSROOM APPLICATION: Instructors can use the article as a basis to stress two points. First, given the caps established under emissions regulations, permitting firms to trade emissions credits reduces the cost, or improves the economic efficiency, of enforcing the regulation. Second, the regulation carries a cost. Production costs will increase, which could reduce profits or result in higher prices.
1. (Advanced) What is "cap and trade"? Why do economists favor the "trade" component of cap and trade as a means to allocate the reductions in carbon emissions?
2. (Introductory) Why have some utilities supported cap and trade?
3. (Advanced) Which types of companies oppose limits on carbon emissions?
Reviewed By: James Dearden, Lehigh University