NS4960 Spring Term 2018 Carbon Tax v. Cap-and-Trade http://www.davidsuzuki.org/issues/climate-change/science/climate-solutions/carbon-tax-or-cap-and-trade/

Carbon Tax I Carbon Tax Pricing carbon emissions through a carbon tax is one of the most powerful incentives governments have to encourage companies and households to reduce carbon emissions Tax is placed on greenhouse gas pollution mainly from burning fossil fuel Can be done by placing a surcharge on carbon-based fuels and other sources of pollution such as industrial processes A shift by households, businesses and industry to cleaner technologies increases the demand for energy efficient products and helps spur innovation and investment in green solutions

Carbon Tax II Carbon tax can be made neutral in that it does not increase the total tax liability of households and firms Example – Sweden carbon tax very high at $140 per ton of carbon pollution Since the carbon tax introduced, Sweden’s economy has grown by more than 100% and the country ranks fourth in the world on economic competitiveness

Cap-and-Trade I Cap-and-Trade-System Here the government Puts a firm limit or cap on the overall level of carbon pollution and Reduces that cap year after year to reach a set pollution target As the cap decreases each year, it cuts industry’s total greenhouse gas emissions to the limit set by regulation Forces polluters that exceed their emissions quota to buy unused quota from other companies Government creates and distributes pollution quotas Most fairly and effectively through an auction

Cap-and-Trade II This creates an incentive for firms to reduce their emissions and be able to sell rather than purchase pollution quotas Under this system the market determines the price of quotas In this way the emission cap ensures that total pollution goes down and companies are given an economic incentive to find better ways to reduce greenhouse gas emissions and support clean energy Cap-and-Trade has been used successfully in U.S. to reduce emissions of sulphur dioxide and nitrous oxide – ingredients in acid rain System was able to reduce acid rain forming emissions by nearly one half

Comparisons I Carbon Tax or Cap and Trade Much discussion on which is better Simple answer – depends on how each system is designed. The design will determine the environmental and economic effectiveness How strong is the economic incentive (carbon price) to reduce emissions and switch to cleaner energy? To which emission sectors does the system apply? How will the revenues be used? Are they invested in green infrastructure or corresponding tax breaks?

Comparisons II Most experts feel if both approaches are well designed the two options are quite similar and cold be used in tandem Cap and trade has one key environmental advantage over a carbon tax: It provides more certainty about the emissions that will result, but Little certainty about the price of emissions (which is set by the emissions trading market. A Carbon tax has one key advantage. It is quicker and easier for governments to implement. A carbon tax can be very simple. It can rely on existing administrative structures for taxing fuels and therefore can be implemented in just a few months.

Comparisons III In theory the same applies to cap-and-trade systems, but in practice they tend to be much more complex. More time is required to develop the necessary regulations and they are more susceptible to lobbying and loopholes. Cap and trade also requires the establishment of an emissions trading market.