1. NS4960 Spring Term 2017 Carbon Tax v. Cap-and-Trade

2. 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

3. 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

4. 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

5. 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

6. 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?

7. 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.

8. 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.