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Economics 100B
Mini-Project #3 (Due May 29, 8:00 pm)
Spring 2020
Instructions
Please give a concise 150-200 word response. Your grade will be determined by (1)
the clarity of your response, (2) the organization/grammar, and (3) the strength of
arguments. To fully satisfy the third criteria, students must apply the relevant course
material to the problem.
Prompt
California (CA) is often cited as the leader in climate policy within the U.S. and in 2013
the state launched its cap and trade system (hereafter referred to as CTS) which regu-
lates six dierent types of emissions for industrial and energy sectors within the state.
These two sectors account for an estimated 85% of all emission sources within the state.
The main appeal that market based policy instruments like a CTS (another exam-
ple is a pigouvian tax) has is that it theoretically acheives an environmental goal at the
least cost to society. In other words, polluters that can reduce pollution the cheapest
will do so before those who can only do so at a high cost under a market based policy
instrument. For more background on what a general CTS is, click here. To learn more
about CA’s CTS, click here or here or here.
Question 1: Proponents of CA’s CTS claim that the system is a success, reaching
CA’s annual emissions targets at least cost. What assumptions must hold for this claim
to be true?
Question 2: Suppose that the CA’s CTS is able to acheive any environmental
target at least cost. Why might there still be an optimality issue? In other words, even
if CA’s CTS can acheive a cap at least cost, why might this system still fail to acheive
the optimal level of greenhouse gases?
1

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