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If the cap is set appropriately, then the equilibrium price of allowances, in theory, adjusts so that it equals the marginal external damages from a unit of pollution. This equivalency implies that any externality associated with emissions is completely internalized by the firm. For polluters with marginal abatement costs greater than the allowance price, the cheapest option is to purchase additional units and continue to emit. For polluters with marginal abatement costs less than the allowance price, the cheapest option is to reduce emissions and sell their permits.

Allowances may also be allocated to polluters according to a specified rule. This represents a transfer from the government to polluting firms, some of which may find that the value of allowances received exceeds the firm's aggregate abatement costs.

The establishment of environment legislature leads to introduction of rate based trading system. Rather than establish an emissions cap, the regulatory authority under a rate-based trading program, establishes a performance standard or emissions rate. Sources with emission rates below the performance standard can earn credits and sell them to sources with emission rates above the standard. As with the other trading systems, sources able to improve their emissions rate at low cost have an incentive to do so since they can sell the resulting credits to those sources facing higher costs of abatement. However, emissions may increase under these programs if sources increase their utilization or if new sources enter the market.

Therefore, the regulating authority may need to periodically impose new rate standards to achieve and maintain the desired emission target, which in turn may lead to uncertainty in the long term for the regulated sources.

In addition the establishment of legislature leads to imposition of emission taxes. Emissions taxes are exacted per unit of pollution emitted and induce a polluter to take into account the external cost of its emissions. Under an emissions tax, the polluter will abate emissions up to the point where the additional cost of abating one more unit of pollution is equal to the tax, and the tax will result in an efficient outcome if it is set equal to the additional external damage caused by the last unit of pollution emitted.

As an example of how an emissions tax works, suppose that emissions of a toxic substance are subject to an environmental charge based on the damages the emissions cause. To avoid the emissions tax, polluters find the cheapest way to reduce pollution. This may involve a reduction in output, a change in inputs to production, the installation of pollution control equipment, or a process change that prevents the creation of pollution. Polluters decide individually how much to control their emissions, based on the costs of control and the magnitude of the tax (Hoque 2005).

The polluting firm reduces emissions to the point where the cost of reducing one more unit of emissions is just equal to the tax per unit of emissions. For any remaining emissions, the polluter prefers to pay the tax rather than to abate further. In addition, the government earns revenue that it may use to reduce other pollution or reduce other taxes, or may redistribute to finance other public services. While difficult to implement in cases where there is temporal and/or spatial variation in e本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。