Twenty First Century

Twenty-first Century Skill: Trading Carbon CreditsPublished:| June 8, 2011| Author:| Julia Hanna| Cap and trade has become an increasingly popular mechanism which is used by governments to increase green behavior and to cut corporate pollution. this article told, the students at Harvard Business School use a simulation to learn how it works and includes an interview with professor Peter Coles. In industries it’s really important to know how cap and trade Works and because of that a Harvard Business School professor, Peter Coles, gives his students an opportunity to experience the carbon trading simulation.
He has used the simulation in the elective course “Managing Networked Businesses and the doctoral course Market Design”. The basic concept is a cap which is set on carbon emissions. Students are wanted to try to rise profits with clean technologies. So that we can say the simulation provides a classroom experience for students to see the impact of different design principles in the cap-and-trade mechanism. At first nobody knows what the appropriate permit price is so they are in an unknowledge and fort his situation, Coles says, “Those who make poor choices feel the consequences of price uncertainty most deeply”.
One of the cement factory managers begins with no permits. While that may seem unfair, it’s a condition that mirrors real life. “Typically, these permits are grandfathered,” Coles says. “They go to incumbent firms with the best lobbyists, while the new guy faces an uphill battle. ” Sometimes groups will find that the price drops to zero, upsetting students who are stuck with suddenly worthless permits. In other instances, the price rises dramatically. Both extremes offer useful discussion points,” says Coles, noting that the Europe Union experienced a price collapse in 2006 that called the stability of the entire market into question. “As a class we can talk about whether a price collapse is really a problem, and if so, what can we do to fix it. A simple solution would be to not issue so many permits, which is easier said than done. Another is to allow unused permits to be banked for future periods, while a third would be to establish a government-imposed floor or ceiling on rading prices that would protect firms from those extremes. ” The profit point The profit-driven behavior of the cement factory managers eventually creates a clear “aha! ” moment. “No one is thinking about efficient reduction of pollution during the exercise, and that is really the whole point of the cap-and-trade scheme,” Coles says. “A property right is assigned to produce a certain amount of pollution and then market principles go to work. Afterward, in discussion, we look at what’s happened and see that we’ve held pollution to the cap level incredibly efficiently. In the discussion, he adds, it’s possible to go through the math behind the dynamic and the role of marginal cost of abatement in reaching this point. Students consider other market design factors during the debriefing session, such as determining how to set initial permit allocations. As mentioned, grandfathering would give incumbent firms an advantage; other options include auctioning permits to the highest bidders, or assessing each firm’s operations by size and industry and then estimating benchmark pollution levels; if a firm exceeded those levels, it would need to buy additional permits.

Trading in the United States While the United States hasn’t taken part in global carbon cap-and-trade schemes, Coles notes that it has long had trading programs for sulfur and nitrogen oxides, the emissions that cause smog and acid rain. “Our ‘SOx’ and ‘NOx’ markets are well functioning. It’s an easier problem to solve because it’s a more local pollution. By contrast, if China, the United States, and India decide not to join a global carbon trading scheme, Europe’s efforts may appear insubstantial in reducing global warming.
Worse, if cap and trade puts European firms at a permanent disadvantage in the global market, this may further erode European industry support. ” Using a simulation to grasp the mechanics and economic efficiencies of cap and trade is one matter. But factoring in the complexities of global politics? Coles has been thinking about an extension of the simulation, in which the United States joins the European Union’s carbon market as a means of testing what happens when markets are linked. There will probably never be a simulation that captures and accurately predicts the intricacies of eopolitics—but it’s a start. Cap and trade has become an increasingly popular mechanism which is used by governments to increase green behavior and to cut corporate pollution. this article told, the students at Harvard Business School use a simulation to learn how it works and includes an interview with professor Peter Coles. In industries it’s really important to know how cap and trade Works and because of that a Harvard Business School professor, Peter Coles, gives his students an opportunity to experience the carbon trading simulation.
He has used the simulation in the elective course “Managing Networked Businesses and the doctoral course Market Design”. The basic concept is a cap which is set on carbon emissions. Students are wanted to try to rise profits with clean technologies. So that we can say the simulation provides a classroom experience for students to see the impact of different design principles in the cap-and-trade mechanism. At first nobody knows what the appropriate permit price is so they are in an unknowledge and fort his situation, Coles says, “Those who make poor choices feel the consequences of price uncertainty most deeply”.
One of the cement factory managers begins with no permits. While that may seem unfair, it’s a condition that mirrors real life. Sometimes groups will find that the price drops to zero, upsetting students who are stuck with suddenly worthless permits. In other instances, the price rises dramatically. “Both extremes offer useful discussion points,” says Coles The profit-driven behavior of the cement factory managers eventually creates a clear “aha! ” moment.
Using a simulation to grasp the mechanics and economic efficiencies of cap and trade is one matter. But factoring in the complexities of global politics? Coles has been thinking about an extension of the simulation, in which the United States joins the European Union’s carbon market as a means of testing what happens when markets are linked. There will probably never be a simulation that captures and accurately predicts the intricacies of geopolitics—but it’s a start.

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