The Economics of Carbon Abatement: An Integrated Diagrammatic Framework

Abstract

The aim of this article is to present the economics of carbon abatement in an integrated framework that would be suitable for courses in introductory to intermediate microeconomics and public economics. While the core ideas are well known, the innovation here is to integrate the markets for carbon emissions, carbon abatement and carbon permits in a diagrammatic framework. This framework is then used to analyse a range of issues in the public debate about carbon abatement and carbon trading schemes, such as the allocation of free permits to certain industries, tax concessions on particular carbon-intensive goods such as gasoline, government subsidies for renewable energy, and issues determining the path of the optimal carbon tax over time.

JEL Classification: H23, Q54, A22