CARBON TAX vs. CAP AND TRADE

CARBON TAX

A carbon tax is a tax on the emission of carbon dioxide. Some economists and policy makers believe that taxing a negative behavior, such as emitting carbon dioxide into the atmosphere, will discourage such behavior. A carbon tax is a direct policy approach to reducing the amount of carbon in the atmosphere, as opposed to a market-based cap-and-trade approach. This kind of tax is one method that can be used to reduce the amount of carbon emissions, which lead to global warming and climate change.  As a result of a government instituted carbon tax, a power plant, for example, would have to pay a certain dollar amount in proportion to how much carbon dioxide it produces.  Many Western European countries have already implemented carbon taxes, while others are still in the process of discussing the costs and benefits.  The United States has not yet instituted a federal carbon tax, though some cities have done so on a local level.

CAP AND TRADE

Cap and trade is one method for regulating and ultimately reducing the amount of pollution emitted into the atmosphere. It is viewed as a more democratic solution to regulating pollution than a carbon tax as it creates a commodity out of the right to emit carbon and allows the commodity to be traded on the free market.The basic concept involves two parties, the governing body and the regulated companies or units emitting pollution. The government sets a cap on pollution, limiting the amount of carbon dioxide and other harmful output that companies, or other groups, are allowed to release. The government then issues credits which allow companies to pollute a certain amount, as long as the aggregate pollution equals less than the set cap. Since some companies can reduce polluting emissions more inexpensively than other companies, they may engage in trading any extra permits. Companies that can more efficiently reduce pollution sell permits to companies that cannot easily afford to reduce pollution. The companies that sell the permits are rewarded while those that purchase permits must pay for their negative impact. Applied to climate change, this system would theoretically reduce carbon emissions at the lowest total cost.  Economists debate whether a cap and trade system or a carbon tax is more effective in reducing carbon emissions. Currently, the European Union has instituted an Emissions Trading Scheme that utilizes cap and trade principles, and the same system is favored in American policy debates. Many view the cap and trade system as having the same ultimate effects as the carbon tax, but many politicians have yet to agree. Successful cap and trade systems need to have an extremely strict and knowledgeable governing body. Accountability on the part of the companies involved is the biggest concern for anyone trusting the cap and trade system to work. Politicians in the past have simply supported or disagreed with cap and trade through discourse, but future legislation could change that.