Q: The Paris Climate Conference (COP21) in December 2015, 195 countries adopted the first ever universal, legally binding global climate deal. The agreement sets out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2 degrees Celsius. COP21 limits the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning at some point between 2050 and 2100. Some countries are concerned about the costs of making such a cut in carbon emissions. Economists have measured that the cost of pollution control is between $15 - 20 per ton of carbon emitted. However, there is a great deal of uncertainty about what the costs might be; some say it will be easy to reduce carbon emissions, others say it will be very expensive. In one developed country, two proposals are being considered to achieve the reduction. Proposal A involves the issuance of permits for carbon emissions every year, with the number of permits equaling the targeted emission level proposed by the Paris Agreement (assume that the target is 8% less carbon emissions than in 2000). Each permit will be good for emitting one ton of carbon. Proposal B is the same as Proposal A except that the government agrees to sell an unlimited number of additional permits for $20 each.
a. Explain how each of these proposals work and what the price of permits might end up being under each proposal.
b. Discuss the pros and cons of each proposal.
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