Carbon Tax or Trade ?

Under a ‘cap and trade’ model, aggregate emissions levels are fixed, permits allocated to carbon emitters and a market established to trade permits. The price for a tonne of carbon emissions will be determined by the supply and demand of the permits. Industries and countries are essentially paying for the right to pollute. Those who are able to reduce emissions through technology will be able to sell excess permits for revenue.

A carbon tax imposes a price proportionate to the carbon output. Heavy carbon emitters, such as coal fired power plants, will be taxed more heavily than oil or natural gas. A revenue neutral carbon tax can generate revenues to offset other taxes, such as income tax.

The Arguments for Trading

– Trading leads to higher prices and guarantees emissions will fall.

– Trading allows reductions to take place wherever costs are lowest.

– Creating a market system for pollution could drive reductions below targets.

– Permits allow for adjustments when inflation and external price shocks occur, but taxes do not.

The Arguments for Taxation

– Carbon tax provides a more predictable trajectory for energy prices.

– Taxation would reach not only industries or countries, but also individual consumers and other sectors, such as transportation.

– Taxation would not be subject to private or special interests.

– Costs are low and the process is simple for the implementation of taxation, relative to trading.

– The revenue from carbon taxes can be used to offset other taxes and create profound macroeconomic and political benefits.

– It could also be re-invested in the same industry that was taxed, promoting energy efficiency or climate change efforts among dedicated companies.

Nicholas Stern – Carbon Tax or Trade

Nicholas Stern – why a carbon tax is not the best option The big advantage of responding to climate change by setting caps on quantities of emissions is that, unlike a carbon tax, capping emissions immediately goes to the heart of the climate challenge, Sir Nicholas Stern told a Bali side-event.

“It is important to go to the variable that is causing the problem," he said.

“You start with a fixed quota [in the form of a country target] and you organise everything around that quota," he said.

“That’s the right way to look at it from my point of view. Because it is that that is causing the problem and it is that you are trying to control."

In an entirely certain world you could reach the desired limit on emissions through a tax or regulation, Stern said.

“The problem is that we do not live in a certain world. That is why I think it is important to go directly to the variable that is causing the problem, directly to the variable that matters on climate change. And that is emissions.”

Sources:

Global Policy Forum 1998, American Enterprise
Carbon and Environment Daily, http://www.cedaily.com.au/