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Unit 6: Carbon Emissions Game

Gautam Sethi, Bard College
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Summary

In this unit, students play a game, a variation on the "Pollution Game" (Corrigan 2011), to develop an appreciation of the pros and cons of the commonly discussed policy options for carbon abatement (e.g., carbon tax, emissions trading).

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Learning Goals

After completing this unit, students will be able to:

  1. Compare and contrast commonly discussed policy options for mitigating carbon pollution.

Context for Use

This game is useful at multiple levels for students of all disciplines. This unit can be used in introductory environmental studies and science courses, intermediate or advanced microeconomics or environmental economics courses and upper division geoscience and law and policy courses that use the module. This unit is flexible enough to be used as a stand-alone introduction to the pros and cons of pollution control policies. It is designed to be carried out over one long class period (75-80 minutes) but can be adjusted for shorter class periods. See suggestions in the the Teaching Notes and Tips section below.

Description and Teaching Materials

Teaching Materials Required for Unit 6

Unit 6 powerpoint (PowerPoint 2007 (.pptx) 6.2MB May13 17) to introduce the concept of carbon pricing to reduce emissions.

along with these handouts for the Regulator (Microsoft Word 2007 (.docx) 141kB Nov9 16) and the two utilities Ace Energy (Microsoft Word 2007 (.docx) 204kB Nov9 16) and Deuce Energy (Microsoft Word 2007 (.docx) 158kB Nov9 16).

Prior to class session

Before the class meeting, students should read:

  1. Policy Options for Regulating Emissions (Microsoft Word 2007 (.docx) 139kB Nov9 16) which provides an overview of criteria used for comparing common approaches for achieving emissions reductions.
  2. This Report (Acrobat (PDF) 90kB Sep1 16) by Peter Orszag about climate change when he was the Director of the Congressional Budget Office.

During class (2 part, total time: 90+ minutes)

In this unit, students will evaluate and compare commonly discussed options for regulating carbon emissions (command & control, emissions trading, carbon tax) with an in-class game based on Corrigan (2011)'s Pollution Game. The Unit 6 powerpoint (PowerPoint 2007 (.pptx) 6.2MB May13 17) is used to introduce policies used in the

Part 1. Introducing Carbon Pricing (15 min Introduction)

As you collect the CBA Assignment, ask students if they have any questions about CBA or the main policy approaches for regulating air pollutants.

Using the

, explain the outline of the game as you separate the students into teams (see additional notes on team formation in Teaching Tips below). Distribute the handouts to the respective teams: Regulator (Microsoft Word 2007 (.docx) 141kB Nov9 16), Ace Energy (Microsoft Word 2007 (.docx) 204kB Nov9 16), and Deuce Energy (Microsoft Word 2007 (.docx) 158kB Nov9 16). Encourage students to play the game strategically to mimic real-world conditions.

Part 2. Carbon Pollution Game (75+ minutes Group Activity)

Follow the instructions in the

to facilitate the game.

With 15 minutes remaining, use some of the follow-up questions to generate discussion.

  • Why are tools like carbon taxes and emissions trading called market-based instruments?
  • What are the key advantages of using market-based instruments?

Market-based instruments are those that allow businesses to choose their abatement options, as opposed to the government mandating which abatement technologies must be used by regulated entities. Since both carbon taxes and emissions trading allow this flexibility, they are called market-based instruments (see Policy Options for Regulating Emissions (Microsoft Word 2007 (.docx) 139kB Nov9 16) for details).

  • Between carbon taxes and emissions trading, which policy option allows regulators greater flexibility?
Emissions trading allows more flexibility since regulators can (relatively) easily add or remove permits from the system. It is significantly harder for regulators to lobby Congress and for Congress to make amendments to the law setting the carbon tax.
  • Would you expect abatement costs to be similar or different across firms?
  • What would make these costs similar?
  • What would make them different?
Since abatement costs are based on financially feasible technologies available to firms, these costs will be different across firms whose operations are vastly dissimilar. For example, a chemical company and an electric utility are likely to have very different carbon abatement costs. As are a nuclear-based utility in California and a coal-based utility in Ohio. On the other hand, two electric utilities, both operating in the Northeast, are likely to have similar abatement costs.
  • Operationally, how are carbon taxes different from emissions trading?
Carbon taxes set a cap on the cost for businesses to emit carbon, whereas emissions trading sets a cap on the amount of carbon firms can emit. (see Policy Options (Microsoft Word 2007 (.docx) 139kB Nov9 16) for details).
  • What is the political issue at the heart of permit allocation in an emissions trading scheme?
  • What kind of an allocation scheme would you recommend?
  • Since regulators have, at best, only a vague estimate of firm-specific abatement costs, which tool---a carbon tax or emissions trading---is superior? Explain how your answer depends fundamentally on the science of climate change.
Since permits limit emissions, they are valuable and command a market price. Thus, the initial allocation of permits among firms essentially involves transfer of wealth among parties. If permits are handed out for free, as has largely been the case thus far both in the case sulfur dioxide regulation and RGGI (Regional Greenhouse Gas Initiative), the government is essentially transferring wealth to the regulated entities. On the other hand, if permits are sold or auctioned, the government can earn revenue that could be used for various purposes, including subsidizing cleaner fuels. Economists favor the latter option, but politicians prefer the former option to reduce regulatory resistance and to benefit their constituents. (See section on role of uncertainty in Policy Options (Microsoft Word 2007 (.docx) 139kB Nov9 16))

Teaching Notes and Tips

  • Be aware that Regulator team gets a little shorted; they don't have to "do" the same calculations that the utilities do. The instructor can spend some time with them during the carbon tax round (when they were waiting on numbers from the utilities) going through a sample calculation to prepare them for what they will get from the utility teams.
  • If your class period is less than 75 minutes and you want to complete in a single class period, consider providing students with the outcome of Phase 1 (CAC) and only playing Phases 2 and 3.
  • There's also a lot of down time while the Utilities are waiting on the Regulators and vice versa. A suggestion could be to have the instructor be the Regulator and have he/she plot up what they *think* the utilities' MAC curves must look like based on the information each group gave them on the board, then set the tax that way. Then there could be more than two utilities, providing more opportunities for larger classes.
  • Ideal size of each group is about 3 to 4. To suit your class size, you can make duplicates of the Ace and Deuce handouts to create additional groups of emitters using the same data. The more emitters the more realistic the game!

Assessment

Learning Goal is assessed informally through game play and discussion and formally with the Op-Ed writing assignment (Microsoft Word 2007 (.docx) 90kB Nov8 16) introduced at the end of the module in Unit 7.

References and Resources

Corrigan, Jay R. (2011) The Pollution Game: a Classroom Game Demonstrating the Relative Effectiveness of Emissions Taxes and Tradable Permits. The Journal of Economic Education 42 (1): 70–78. doi:10.1080/00220485.2011.536491.

environment360. (No date) Putting a Price on Carbon: An Emissions Cap or a Tax?

Environmental Defense Fund. (No date) Cap and trade

Krugman, Paul. (2009) Unhelpful Hansen. New York Times, December 7, 2009.

Orzsag, Peter R. (2007) Issues in Climate Change. Congressional Budget Office.

Pew Center on Global Climate Change. No date. Climate Policy Memo #1: Cap and Trade v. Taxes. Retrieved at Climate Policy Memo #1.

Stavins, Robert. (No date) Cap-and-Trade, Carbon Taxes, and My Neighbor's Lovely Lawn. An Economist's View of the Environment.

Weitzman, ML. (1974) Prices vs. Quantities. The Review of Economic Studies, pp. 477–91.

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These materials are part of a collection of classroom-tested modules and courses developed by InTeGrate. The materials engage students in understanding the earth system as it intertwines with key societal issues. The collection is freely available and ready to be adapted by undergraduate educators across a range of courses including: general education or majors courses in Earth-focused disciplines such as geoscience or environmental science, social science, engineering, and other sciences, as well as courses for interdisciplinary programs.
Explore the Collection »