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There is an interesting look at emissions trading, which is going to take an increasing role and for which biological sinks may be significant.
Above it is assumed that quotas are allocated according to emissions.
The marginal costs of carbon dioxide emissions and the returns to investment in development are readily compared.
We estimate the marginal cost of reducing carbon emissions beyond the existing baseline.
We may also say that the adjustment of emissions is effected within almost three periods.
Option values are attached to the three possibilities: to stop emissions temporarily, to exit entirely and to re-start polluting (for an 'entry fee').
However, emissions are not necessarily the most relevant measure of (subjective) environmental quality.
Note that particulate emissions from the chemical plant are significantly higher than emissions from the iron foundry.
Therefore, in terms of social costs of abatement an emissions tax is as efficient as a standard.
At this tax rate, there is nearly 96 per cent reduction in emissions on average with a cost increase of less than 50 per cent.
The firms do make efficient choices under an emissions tax.
The plants choose low-ash coal to abate particulate emissions.
The policies that are considered include an emissions standard, an emissions tax, an ash tax, and a coal tax.
An emissions tax induces efficient allocation of abatement across firms, even when all the firms are different and some firms abate more than the others.
If we consider first an emissions standard, then the switch to a baghouse depends on plant-specific standards.