Emission Markets

Vincent Kaminski

This chapter will review the different market-based solutions developed to address the challenge posed by externalities generated in the process of producing and consuming energy commodities. We will limit its scope to the emissions of certain gases and particulate matter pollution by power plants. An externality, as has been mentioned several times in this book, is the impact of economic activities of some producers/consumers on other producers and consumers, which are not captured in market prices without government intervention. Externalities are often seen as one of the primary reasons of market failure – defined as a market equilibrium that does not represent an optimal allocation of resources. The price system fails sometime to internalise certain private costs that are imposed on others without a corresponding compensation. Economic theory suggests there are a number of public policy measures that can be used to correct market imperfections, and many of the solutions discussed here have previously been suggested by long-forgotten economists. This is another proof regarding Keynes’ views on the ability of economists to influence public debate from beyond the grave.¹¹“The