The Chicago Board of Trade voted to create a private market for right to emit su
ID: 1198472 • Letter: T
Question
The Chicago Board of Trade voted to create a private market for right to emit sulfur dioxide. The Clean Air Act of 1990 established a limit, beginning in 1995, on total emissions of sulfur dioxide from 110 power plants. Firms finding it relatively expensive to cut their sulfur dioxide emissions are likely to buy pollution permits because such permits cost less than cutting their emissions. Given that firms can exceed their legal limit and pay fines of $2,000 per ton, do you think that the price of a right to emit a ton of sulfur dioxide exceeds $2,000, why or why not?
Explanation / Answer
Since the polluters will always go for the cheaper option, whether it is in the form of a (pollution) tax or permit to pollute or a fine, setting the permit price above the fine would make paying the fine cheaper for the polluters. Polluters would find it beneficial and cost-effective to pay the fine rather than buying the relatively expensive permit.
Hence, the permit price must be set below the fine amount of $2000, in order to incentivize the polluters from reducing their pollution, rather than pay the fine.