6 Dec 2012

Cap and trade in practice

I ran a cap and trade experiment in my class,* to show students how they could benefit from a market that allowed them to trade their (capped permits) for pollution emissions.**

This experiment [65 minute mp3] clarified how "normal" people can listen to the idea but not understand how to implement it.

It also clarified the importance of setting a real cap, understanding whether manufacturers are pursuing profit or volume, and the efficiency with which market prices reveal social values (see the photo).

Blue and white from first round, pink and yellow on second

* Teachers -- or the merely curious -- can download the instructions here (pdf), while noting that one must adapt the rules to the local teaching situation.

** Cap and trade (also discussed in that lecture) is neither as efficient nor as easy to implement as carbon taxes, which appear to be back on the agenda for governments that are (1) looking to reduce carbon emissions and (2) broke. I wrote many posts on the virtues of carbon taxes. My class exercise would have produced better results (with less time and chaos) if we had used a carbon tax.


  1. Are you using inverse demand functions? Also, how do you know carbon taxes would work better unless you ran a similar experiment? Good stuff.

  2. Yes, they are inverse on the chalkboard, but I was asking Q for a given P. Carbon taxes would be better/easier b/c a tax of $x would lead them to choose Q for units with a value > $x.


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