5) Is EU intervention to reduce C02 emissions through the Emissions trading scheme always for the best? Discuss [20] (Extract 5)

The EU trading scheme is a policy that aims to reduce the negative externality arising from the increase in the CO2, by reducing its amount in the atmosphere. It tries to achieve by imposing tradable permits which most of the CO2 emitting industries have to pay for every tonne of CO2 that they emit to the atmosphere. The essay will assess the pros an cons of reducing this type of externality.

The pro of this policy is the fact that it introduces the market mechanism, hence the prices of the pollution permits are regulated by the demand and supply forces. Therefore the government does not has to assess the price of the pollution permits.

This market based mechanism allows to give greater incentive to the emitters of the CO2 to reduce the negative externality. Those who produce more than their amount of pollution permit allows them, have to buy more. Those who go below the amount of CO2 they were given, can sell their pollution permits.

Moreover, the system is efficient as its relatively economic, as it does not requires controlling the exact amount of emitted CO2. Moreover, those who support the ETS, argue that it is more politically feasible, as it is less controversial than tax, to which the public opinion tends to be hostile.

Those who support the ETS, argue that the system is reducing the dead weight loss to minimum, contrary to taxation, which seems now to be the only alternative to the pollution permits system.

A speculative argument could point that the system fails to increase the governmental revenue, which is particularly important in the times of massive bail outs is increasingly important.

Additionally, the ETS allows to allow a very specific amount of the CO2 being emitted in a period of time, as the government is setting the amount of CO2 that is going to be emitted, by allowing a concrete amount of pollution on the market. The price of the pollution permit will adjust, by the demand and supply forces.

However, the opponents, for instance Geoffrey Sachs argue that the pollution permits scheme has more drawbacks than plusses.

It can be inefficient, when there is for instance large reduction in demand, as occurred in 2008 (ie German national output fell by 20%). This leads to a great reduction in prices of the pollution permits, which therefore means that the negative externality is not going to be reduced sufficiently.

Moreover, the fact that the system is flexible, may make it more responsive to the political pressure, which is most likely to reduce its effectiveness, as the public opinion tends to be reluctant to any system that increases the prices.

Other argument against the system is one that points out the likeability of the situation in which the developing countries will receive more pollution permits, as they will have less chances to reduce the emission of CO2 as fast as developed nations. This would most likely lead to a situation in which industries in developing natinons would buy those permits from the developing countries, which additionally reduce the political feasibility.