CO₂ (carbon dioxide) and other greenhouse gasses are a key cause of climate change. According to some sources Australia has one of the highest per capita emissions of carbon dioxide in the world. Australian political parties seem to be unable to agree on the best way (i.e. best policies) to reduce our emissions.When Kevin Rudd was campaigning to be Prime Minister in 2007 he promised he would implement an Emissions Trading Scheme (ETS) if elected. Once in government Rudd negotiated a Carbon Pollution Reduction Scheme (CPRS), the basis of which was a 'Cap and

Trade System'. Tony Abbott (from the Liberal Party which was in opposition at the time) described Rudd's emission trading plan (the CPRS) as a "Great big tax on everything" and opposed it. They also ran a successful campaign and generated community fear of increased taxes. In 2010 Julia Gillard later replaced Kevin Rudd as leader of the Labor Party (for a few years at least). In 2011 she announced that her government would introduce a carbon price. The intention was that this was to be in place for 3-5 years before a full ETS was implemented. The Labor Party subsequently lost power and the new Coalition Government (Liberals and Nationals) replaced the CPRS with an 'Emissions Reduction Fund" (ERF). The ERF is a voluntary scheme with financial incentives for businesses, landholders and communities to reduce emissions. Example projects funded under the ERF include replacing Melbourne street lights with more energy efficient light bulbs.(For more information see: Parliamentary Library)

(a)Why are tradeable pollution permits (eg. a cap and trade system) considered to be a more efficient way to reduce pollution than government regulation?

(b)The following figure shows a demand curve for pollution rights and the supply curve for pollution permits. The latter is shown to be inelastic. This is because the government has set the quantity of pollution permits available (i.e. it is unresponsive to price).

Suppose there is a sharp improvement in the technology for controlling pollution, what is the effect on the price and quantity of pollution under the system describe by the figure below?

Price of pollution Supply of pollution permits Text Po Demand for pollution rights