Both a carbon cap and trade system and a carbon tax are intended to reduce the emission of carbon by putting a price on carbon emissions. The Decision about enacting either a carbon cap and trade system or carbon tax depends on your goals and who you represent. If you are a business that has a carbon footprint, you may prefer a carbon tax since the cost is predictable and making an economic value decision would be easier. If you are a regulator, you may prefer a cap and trade system to set definite emission reduction goals.
Let’s take a look at why each approach may be preferred. Each approach has its own benefits and disadvantages. A cap and trade system has known emission reductions set by the cap and may be able to generate revenue for the government is allowances are sold by the government. However, the cap and trade system created a variable cost to the business that may need to purchase the allowances from an auction or competitor. The carbon tax creates a continuous incentive for reduction, is straight forward to administer, has a known price to the business, and creates a revenue stream for the government. However, the tax system creates an unknown emission reduction and is less politically acceptable (Sumner, Bird, and Smith, 2009). Opinion: With rampant partisanship in the United States and the inefficient use of tax revenues by our federal government, a carbon tax would be difficult to pass and likely squandered with limited results.
Both systems have been tried in various forms and varying levels. Carbon taxes were the first to enter the stage in the 1990’s with several European nations putting the taxes in place. Carbon cap and trade entered the stage in the 2000’s with the EU and other municipalities. Today the cap and trade has become the system in widest use and the most successful (Pew Center, 2009).
If cap and trade is working, how are we trending? The Energy Information Administration contains worldwide date on carbon emissions (EIA, 2013). The EIA data was used to trend the emission data. For this discussion, we will look at the emission trends for major players: United States, Europe, China, and India. The United States has cap and trade instituted in a couple of regions with the Regional Greenhouse Gas Initiative cap and trade system in seven Northeastern states and the California cap and trade system (Newell, Pizer and Raimi, 2013). These cap and trade systems cover a portion of the United States. The European Union has a cap and trade system across its member nations. China and India are both developing nations without cap and trade systems. What is clear is that the major regions using cap and trade systems are having a real reduction in carbon emissions (US has seen a 8.9% reduction and the EU has seen a 8.3% reduction from 2007 to 2011) while the developing nations without cap and trade are having marked increases in carbon emissions (China has seen a 37.8% increase and India has seen a 26.3% increase from 2007 to 2011). It is possible that some of the carbon reductions are from causes beyond the cap and trade system such as economic slowdowns or renewable energy incentives. What is clear is that the emissions from the developing nations is outpacing the reduction from the industrialized nations (from 2007 to 2011, the US decreased emissions by 535.7 million metric tons of carbon, the EU decreased emissions by 391.2 million metric tons of carbon, China increased emissions by 2338.9 million metric tons, and India increased emissions by 359.5 million metric tons). This fact is also evident from the fact that from 2007 to 2011 the world’s carbon emissions increased from 29.7 to 32.6 billion metric tons of carbon. There was a worldwide increase of 9.8% while the industrialized nations had around an 8.5% decrease. Looks like the globe is losing the carbon fight.
In order to reduce carbon emissions, I would recommend a cap and trade system because it has proven effective and sets clear emission reduction goals. The next step should be a national cap and trade system in the United States to achieve a wider carbon emission reduction at home. The big question: How do we get a global cap and trade system put in place in order to limit the effects of rapid increases in carbon emissions by developing nations? The European Union and United States cannot solve this alone. We all live on the same planet.
References:
Sumner, J, Bird, L, and Smith, H. Carbon Taxes: A Review of Experience and Policy Design Considerations. National Renewable Energy Laboratory, December 2009.
Pew Center on Global Climate Change. Climate Policy Memo #1 – Cap and Trade v Taxes. www.pewclimate.org, March 2009.
Energy Information Administration. International Energy Statistics: CO2 Emissions 2007-2011. www.eia.gov, 2013.
Newell, G, Pizer, W, and Raimi, D. Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges. Journal of Economic Perspectives, Volume 27 Number 1, winter 2013.
Hi. I agree that cap and trade makes the most sense of the two options, but as you said, the US and Europe can’t solve this alone. It will be interesting to see how the shift in energy production here in the US changes the willingness to create policy. I heard Obama say yesterday that the US is on track to produce more energy than it imports this year. Interesting times ahead.
Hi Robert – thanks for this thoughtful post. You’re right, carbon taxes as well as cap and trade systems do each have advantages in design. And, you bring up an excellent point about the economic downturn and the effect it has had on global emissions. Correlation does not equal causation! What I think is most important in all of this is that there are lessons to be learned from the design and implementation of both types of carbon pricing from around the world, including in our own back yard. RGGI was established as a bit of a pilot of what a utility sector cap and trade system for the US might look like. RGGI is certainly fraught with its own problems, including overallocation of allowances which caused the price to plummet early on, but we’re learning something. And, at a time when we can’t get our elected federal leaders to agree on climate change at all (or much of anything, really), these smaller scale efforts are our only opportunity to try to create meaningful change. I think they serve a lot of important roles, some of which extend beyond those benefits of reduced emissions. I think it’s am important way for us to demonstrate to the global community that the US does care about carbon, and maybe the federal government isn’t illustrating that in a way we’d like them to, but all around the country smaller-scale efforts are doing their part to pick up that slack.