Reducing emissions: Is a cap-and-trade system better at reducing carbon emissions than a carbon tax?

Yes

• A cap-and-trade system better encourages companies to cut their carbon emissions: A cap-and-trade system provides companies with credits if they are able to reduce their emissions below an established level. They can then sell these credits for a profit. So, if a company takes action to reduce its carbon emissions below the designated level, than it can make a profit. This is a powerful market incentive that is more likely to cause companies to invest money in finding ways to reduce their carbon emissions. A carbon tax, conversely, only provides the incentive of cutting costs, and does not offer this important profit motive.

• A cap-and-trade system is certain to reduce emissions, which is important in context of the global warming crisis: "Carbon tax vs. carbon market: who would win in a fight?", 9/15/06 - "In a cap-and-trade carbon market, total emissions are guaranteed to go down. The cap is the cap, and assuming some reasonably effective enforcement mechanism, not a pound more carbon can be emitted. A carbon tax, on the other hand, merely encourages people to emit less by making it more expensive to do so. And in the case of fossil fuels, people seem perversely resistant to financial incentives."
  • A post made on economist Greg Mankiw's Blog 4/11/07 - "With the cap-and-trade system, there will be a definite decrease in emissions, while with the tax, the decrease depends on whether the cost of cutting emissions is lower than the potential tax. If it is, emissions decrease, if not, there is no effect."

• The market does a better job of directing investments in the best green technologies: **Bill Chameides, Chief Scientist at Environmental Defense, "Cap-and-trade: more effective than a carbon tax", Grist.org, February 12, 2007 - "Subsidizing one or two targeted technologies with a carbon tax would discourage investment in others that may turn out to be more effective. Which technologies should receive these tax dollars? No one has a crystal ball that can determine for sure which will turn out to be most useful. History has shown that the marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace. The solution is cap-and-trade. A cap-and-trade strategy provides the incentive for all segments of the economy to compete to discover the best ways to cut emissions."

No

• Carbon trading schemes rely on bureaucratic processes to actually reduce emissions. Tax schemes direct the power of market forces towards reducing emissions, rather than merely reducing the price of emissions. Market mechanisms will work far faster.

• A carbon tax would add a clear cost to polluting and create a market incentive to pollute less

• A carbon tax sends a serious and important message about the will to fight global warming

• A carbon tax would shock consumers into needed behavioral changes

• A carbon tax addresses carbon emissions in all industries: Carbon Tax Center, "Carbon Taxes vs. Cap and Trade" - "Carbon taxes address emissions of carbon from every sector, whereas cap-and-trade systems have only targeted the electricity industry, which accounts for less than 40% of emissions."

• A carbon tax would create funds to support environmentally-friendly policies

• A carbon tax provides better incentives for green innovation

• A carbon tax can be implemented immediately While a cap-and-trade system may take a long time to take effect, a carbon tax can be implemented immediately. Due to the urgency of the Global Warming problem, the rapid results of a carbon tax are very important

• A cap-and-trade system is vulnerable to companies tricking the system by polluting heavily before the system begins: The main problem is that baseline emission allowances for companies are based on their past emissions. For this reason, a company has the incentive to emit as much as possible when these baselines are being set so that the baseline is above or at what the company is already emitting. If a company successfully tricks the system in this way, they will be able to emit carbon as they had before, with no reductions being achieved.

• A carbon tax obligates participation, whereas participating in a cap-and-trade system is largely optional: A carbon tax is an "opt-out" program, where all companies are obligated to participate unless taking specific steps to avoid it. A cap-and-trade system is an "opt-in" program, conversely, where companies are not obligated to participate unless they specifically take steps to "opt-in" and participate. This difference makes the carbon tax more imposing and likely to achieve results.

• A carbon tax can be easily adjusted over time to achieve desired emissions results

• Cap-and-trade system don't ensure local area carbon emissions are reduced