1. How would you explain the way a cap and trade policy works to someone who has not studied economics? (4)

2. How would you respond to their concerns that the policy is likely to be ineffective or unfair? Discuss this in the context that the cap and trade policy creates a market.(3)

3. Now draw a cap and trade model where firm A has a technology where y=x and firm B has a technology where y=2x. The functions are the firms' marginal cost of abatement curves. The initial split of permits is 80:20 in favour of firm A. The level of optimal abatement is 150 gigatonnes. Draw the cap and trade model for these two firms and show the outcome after trading. Label all relevant quantities. (8