..GLOBAL WARMING..

The essential problem of climate change is that too much carbon and greenhouse gases are being emitted into the atmosphere, thus raising world temperatures and leading to a host of other problems such as poor health. For economists, climate changeis a classic problem of market failure, as the negative externalities of pollution and the emission of carbon (such aspoor health and potential natural disasters) are not borneby individuals and firms. While consumers receive the full private benefit of driving their cars and firms receive the full benefit of producing products that emit pollutants in the process of doing so, they do notbear the full social costs of the increased pollution. This is because they have no economic incentive to act in ways that minimise pollution. What should we do? Economists have devised policies to solve the problem ofclimate change. The aims of economic policies to combat climate change are straightforward: they should create incentives for future good behaviour (such as developing clean technology) and punish bad behaviour (such as over-polluting or over-consuming) by enabling consumers and producers to realise and bear the full costs of their actions. That is, policiesshould discourage harmful behaviour by raising the cost of doing so. Policies should send clear messages to the public about the likely costs and benefits of climate change control.
In current economic debate, two key policies stand as the most effective curbs on pollution by firms: the cap and trade system and carbon taxes. Cap and Trade In a Cap and Trade system, a governing body (usually the government) “caps” emissions of pollutants and then lets firms “trade” permits that allow them to pollute within those limits. In aglobal context, countries set a limit on how much carbon dioxide firms can emit and then allocate permits to them. The permits are bought and sold in an open market. The economic rationale behind this system is that greenhouse gases and carbon are scarce.
This system has received support from government, business and environmentalist.This is because they set firm limits on actual emissions, thusenabling governments to control and determine the levelof emissions. In addition, the flexibility of carbon markets enables businesses to figure out the least expensive way to reduce overall emissions.
The concept of Cap and Trade isnot mere academic theory, as some nations have already implemented such a system. For instance, under the Kyoto Protocol, targets are set for nations to reduce greenhouse gas (GHG) emissions. This is achieved through three mechanisms: emissions trading(similar to Cap and Trade), Clean development mechanism(CDM) and Joint implementation (JI). The emissions trading system has been implemented by the European Union, which has embarked on an Emission Trading System (EU ETS), the largest multi-national, emissions trading scheme in the world. Under this scheme, firms may trade allowances directly with each other, or may buy or sell via a broker, bank or other allowance market intermediary.
In addition, the United States currently maintains a rather successful cap-and-trade market in sulphur dioxide permits.