Big picture: Market-based instruments use economic incentives to encourage environmentally friendly behaviour, rather than relying solely on regulation.
- Carbon tax
- A fee imposed on the burning of carbon-based fuels, designed to reduce greenhouse gas emissions.
- Cap-and-trade
- A system where a government sets a limit (cap) on total emissions and allows companies to buy and sell emission permits.
- Subsidy
- A financial incentive paid by governments to encourage environmentally beneficial activities (e.g., renewable energy installation).
- Payment for Ecosystem Services (PES)
- Schemes where beneficiaries of ecosystem services pay landowners or communities to maintain those services.
Carbon tax
- Simple to implement
- Predictable price signal
- Revenue can fund green projects
- Does not guarantee emission reduction levels
Cap-and-trade
- Guarantees emission reduction cap
- Flexible — companies find cheapest reductions
- Creates carbon market and trading
- Complex to administer, price can be volatile
Carbon tax vs Cap-and-Trade (HL comparison)
- Carbon tax provides price certainty but not emission certainty
- Cap-and-trade provides quantity certainty but price may fluctuate
- Carbon markets can be volatile depending on permit supply and demand
- Political feasibility differs — taxes are often unpopular, while trading systems can be framed as market solutions
IB exam tip: In evaluate questions, explicitly compare price certainty versus quantity certainty. Examiners reward structured comparison rather than listing advantages separately.
Key concept: Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs (Brundtland, 1987).
Three pillars of sustainable development
- Economic growth — improving living standards and reducing poverty
- Social equity — fair distribution of resources and opportunities
- Environmental protection — maintaining ecosystem health and natural capital
Tensions in sustainable development
- Economic growth often requires resource consumption
- Short-term profit vs long-term sustainability
- Developed nations consume disproportionately
- Measuring progress — GDP vs GNH vs ecological footprint
IB exam tip: Be prepared to discuss alternative measures of development like Gross National Happiness (GNH) or the Human Development Index (HDI) alongside GDP.
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- Green economy
- An economy that aims to reduce environmental risks and ecological scarcities while improving human wellbeing and social equity.
- Circular economy
- An economic model that eliminates waste by keeping materials in use through reuse, repair, recycling, and remanufacturing.
Principles of the circular economy
- Design out waste and pollution
- Keep products and materials in use
- Regenerate natural systems
- Shift from ownership to service models
- Use renewable energy and materials