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Check out the teaching resources from the WSJ's Microeconomics Weekly Review, this time reviewing the article on Kyoto's offsets program ...

French Firm Cashes in Under U.N. Warming Program
by Charles Forelle
Jul 23, 2008
Page: A1

TOPICS: Environmental Regulation

SUMMARY: A French industrial giant is reaping a potential billion-dollar windfall under a U.N. program intended to curb greenhouse-gas emissions in the developing world, highlighting the pitfalls of using market forces to tackle global warming.

CLASSROOM APPLICATION: The article offers a good case analysis of the cap-and-trade system. There are two interesting issues highlighted in the article. The first is the fairness issue of the establishment of the countries, and plants within the countries, that receive the initial permits to emit greenhouse gasses. "The money is meant to flow to poorer countries to develop clean-air technology -- for instance, an African nation would get a financial incentive to build windmills instead of a cheaper, but dirtier, coal-fired power plant." The second issue is how the ability to earn revenues from selling credits affects changes the incentives to cut back. "The U.N. system is designed to use market mechanisms -- the trade in credits -- to curb emissions in the developing world without stunting those countries' economies. Critics say the system is flawed. The money from selling credits reduces the incentive for a relatively wealthy country like South Korea to adopt voluntary cuts of its own, they argue. 'Markets are incredibly powerful institutions,' says David Victor, a Stanford University professor who studies climate policy. But in some cases, he says, 'you cannot create the right kind of market forces."

QUESTIONS:
1. (Introductory) What is the cap-and-trade system?

2. (Advanced) Should developing countries be granted permits to pollute and then have the ability to sell those permits? In the granting of permits to developing countries, should South Korea be considered a developing country?

3. (Advanced) Does the cap-and-trade system, currently implemented under the Kyoto Protocol, reduce the incentive of South Korea to adopt voluntary cuts of their own?

Reviewed By: James Dearden, Lehigh University