Lesson Plan: Environmental Economics: Cap-and-Trade

As an Undergraduate Economics teacher, you can use this set of computer-based tools to help you in teaching climate mitigation environmental policies and specifically about the cap-and-trade system.

This lesson plan allows you to teach about economic policy responses to climate change. This lesson plan includes resources to explain various policy approaches to mitigating climate change such as carbon taxes and cap-and-trade systems, their differences, and advantages. It includes an engaging classroom activity to help your students to apply economical concepts such as price formation, market-based incentives, and transferable quotas/permits; and learn about carbon pricing, carbon taxes, and the cap-and-trade environmental policy.

Thus, the use of this lesson plan allows you to integrate the teaching of a climate science topic with a core topic in Economics.

Carbon Pricing Dashboard by The World Bank

About Lesson Plan

Grade Level Undergraduate
Discipline Economics
Topic(s) in Discipline Climate Mitigation Environmental Policy,

Pricing, Market-based Incentives,

Transferable Quotas/Permits,

Cap-and-trade, Carbon Taxes, Carbon Pricing

Climate Topic Energy, Economics, and Climate Change;

Climate Mitigation and Adaptation

Location Global
Language(s) English
Access Online, Ofline
Time Required
60 – 90 min


Use this lesson plan to help your students find answers to:

  1. What is a carbon pricing policy?
  2. What is the cap-and-trade system?
  3. Compare the carbon tax and the cap-and-trade policies. Which system do you support?
  4. The cap-and-trade policy would be effective in reducing worldwide emissions if all countries participate. Explain how this would affect the economic growth of your nation.
  5. Climate change is a global issue and the cap-and-trade policy would raise the cost of living especially affecting the poorer nations. How could governments address this issue through their economic policies?


Teaching Module (30-45 min) A teaching module to introduce and discuss the cap-and-trade environmental policy to mitigate climate change. This can be accessed here.
Classroom/ Laboratory activity  (30 – 45 min) An engaging classroom activity using a mobile app or a paper-based interaction, to enable a better understanding of the cap-and-trade system. This can be accessed here.
1 Topic introduction and discussion Use the teaching module, ‘Cap and trade environmental policies’ by the CORE Project, to introduce climate change mitigation policies such as carbon pricing. Use the module to teach about economic tools such as carbon taxes and the cap-and-trade policy.


Discuss the given examples of the cap-and-trade systems used in the past to highlight its benefits. Use the exercises given in text to enable your students to assess the advantages and disadvantages of the carbon tax and the cap-and-trade systems. Note that these exercises involve some extensive readings.

This can be accessed here.

2 Apply understanding Use the working paper, ‘For want of a chair: teaching price formation using a cap and trade game’ by Stefano Carattini et al., provided by the London School of Economics and Political Science, to engage your students in an in-class game to apply their understanding of economic concepts such as price formation, market-based incentives, and trading of quotas/permits. Use this game to highlight key tenets of environmental economics such as carbon pricing and carbon markets.


Use this activity to enable your students to play the role of policy makers and extend their understanding of carbon pricing policies such as carbon taxes and the cap-and-trade systems. Follow the instructions as outlined in the paper to engage the students in either a mobile app (ClassEx) or paper-based interaction. A video guide to using the ClassEx software can be found in the additional resources section of this lesson plan. Finally, encourage your students to discuss their understanding of how emissions trading systems work and how they could use this to assess their nation’s environmental economic policies.

This can be accessed here.