How can marketable emissions permits decrease the amount of a pollutant being generated by industry?

• A. By requiring all firms to use the same pollution control technology regardless of their individual costs.
• B. By subsidizing firms that increase their production, leading to higher overall emissions.
• C. By allowing firms to emit unlimited pollutants as long as they pay a fixed annual fee.
• D. By setting a cap on total emissions and allowing firms to trade permits, which creates an incentive for firms to reduce pollution to sell excess permits.

Answer: (D)

Verified step by step guidance

1. Understand the concept of marketable emissions permits, also known as cap-and-trade systems, which are designed to limit total pollution by setting a maximum allowable level (the cap) for emissions across all firms.
2. Recognize that the government or regulatory body issues a fixed number of permits, each allowing the holder to emit a certain amount of pollution, so the total emissions cannot exceed the cap.
3. Explain that firms can buy and sell these permits in a market, creating a financial incentive for firms that can reduce emissions at lower costs to sell their excess permits to firms facing higher reduction costs.
4. Analyze how this trading mechanism encourages overall pollution reduction efficiently, as firms with cheaper abatement options reduce emissions more and profit from selling permits, while firms with higher costs buy permits instead of reducing emissions.
5. Conclude that this system decreases total pollution by combining a strict limit on emissions with economic incentives for firms to innovate and reduce pollution where it is cheapest to do so.