California (CA) is often cited as the leader in climate policy within the U.S. and in 2013 the state launched its cap and trade system (hereafter referred to as CTS) which regulates six different types of emissions for industrial and energy sectors within the state. These two sectors account for an estimated 85% of all emission sources within the state. The main appeal that market based policy instruments like a CTS (another example is a pigouvian tax) has is that it theoretically acheives an environmental goal at the least cost to society. In other words, polluters that can reduce pollution the cheapest will do so before those who can only do so at a high cost under a market based policy instrument. For more background on what a general CTS is, click here. To learn more about CA's CTS, click here or here or here.

Question 1: Proponents of CA's CTS claim that the system is a success, reaching CA's annual emissions targets at least cost. What assumptions must hold for this claim to be true?

Question 2: Suppose that the CA's CTS is able to acheive any environmental target at least cost. Why might there still be an optimality issue? In other words, even if CA's CTS can acheive a cap at least cost, why might this system still fail to acheive the optimal level of greenhouse gases?