The Kyoto Protocol, drafted in December 1997, calls for each developed country to cut its

emissions of carbon dioxide by the year 2012 to approximately 8% below 1990 levels.

Some countries are concerned about the cost of making such a cut in carbon emissions. Expectations

are that the cost of pollution control will be $5-10 per ton of carbon emitted.

However, there really is a great deal of uncertainty about what the costs might be; some

say it will be easy to reduce carbon emissions, others say it will be very expensive. In one

developed country, two proposals are being considered to achieve the reduction. Proposal

A involves the issuance of permits for carbon emissions every year , with the number of

permits equaling the targeted "8% less than 1990 emissions." Each permit will be good for

emitting one ton of carbon. Proposal B is the same as Proposal A except that the government

agrees to sell an unlimited number of additional permits for $10 each. Explain how

each of these proposals works and what the price of permits might end up being under each

proposal. Discuss the pros and cons of each proposal.