EPS 7 Lecture Notes - Lecture 36: George P. Shultz, James Hansen, Carbon Price

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Carbon tax: government sets the prices of co2 emissions and the market sets the amount of co2 emissions. Government price ($/tc) --market--> total emissions (tc/year) The government taxes fossil fuels, either as burned or as they are pulled out of the ground or brought into the country. That extra cost is passed on to subsequent products (e. g. , coal-powered electricity, gas heating, oil-deprived gasoline). Faced with these higher costs, businesses switch to using the cheaper renewable. Cap and trade: government sets the amount of co2 emissions, and the market sets the price of co2 emissions. Government total emissions (tc/year) market price ($/tc) The year"s number of emissions permits (1 permit per 1 tc) is fixed by the government. At the end of the year, each polluter must have enough permits to cover all of their emissions. Polluters buy and sell permits to make sure they have enough to cover their emissions.

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