SDMB economists: analysis check?

[Rhythmdvl]

If you’re replying to this thread, please (please) assume the following premise is true: there is a well-functioning market for carbon trading, one that takes advantage of comparative advantage (among other things). If you wish to debate or question how carbon markets work, point out problems with implementation, or any host of other issues, there are other threads to contribute to or start. I’m solely asking about economic terminology and analysis here.

The slight background to this is a discussion of the intersection of Clean Development Mechanism (CDM) projects and development in developing nations (can I fit another ‘development’ in there?). In a one-sentence oversimplification, the CDM was set up to allow developed nations to pay for carbon reductions in the developing world, thereby offsetting the project proponent’s carbon output or generating carbon credits for sale. A product of the UN, one element of the CDM is that projects should not only reduce carbon, but also contribute to the host nation’s development. As with the opening, critiques of the CDM are off-topic and I’m hoping that for the purposes of this thread you can put aside ancillary issues and focus on the reasoning behind the paragraph.

I’m working on a section about raising revenue for development projects. This is a very small part of a much larger work, so it’s not a simple or solitary answer to raising revenue—it’s one of an array of tools. Please don’t get distracted with how it fits into the current economic crisis or how it fits into broader policy choices. Also, its focus is on options for developing nations’ governments.

Here is the snippet:

Because pricing decisions in carbon markets are based on parties’ relative efficiencies in reducing emissions, governments and designated national authorities may have the flexibility to impose a levy on these transactions without unduly dis-incentivizing such trades or severely impacting the overall amount of emission reductions achieved. Though any tax will shift the supply curve inward, resulting in higher selling prices and lower units traded, the actual changes to price and quantity depend on several factors in addition to the tax amount. For example, because this does not affect reduction commitments, the shape of the demand curve is fairly inelastic: the quantity purchased is less responsive to shifts in price.

In other words, if there is a $10 difference in cost to reduce, a government can impose a $5 tax on the transaction (this isn’t advocating for that; I’m using basic econ 101 assumptions about numbers, assuming a perfect sphere, etc.). This will leave a $5 difference in cost. The project proponent still faces a lower cost to reduce, so still has the incentive to make the exchange. The project host still sees a $5 incentive to take action (the no-action path results in no revenue), so also has an incentive to enter the transaction.

Implementing this is much more complicated, but beyond the scope of the current book.

Do I have the direction of the supply curve shift correct? Am I using price (in)elasticity correctly? Again, please look at this in the context of a perfect world; if it eventually digresses into a discussion of carbon markets that’s fine, but I’m hoping to get the initial analysis checked.

Oh, jokes, puns, and other fun posts are perfectly welcome.

Thanks,

Rhythm