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Analysis Of Carbon Taxes Versus Cap And Trade

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Over the years, the global environmental crisis has worsened. Large scale political action is necessary in order for change to occur. Politicians and environmentalists have previously turned to solutions surrounding cap and trade or carbon tax legislation. However, with every solution, whether it be cap and trade, or carbon taxes, comes pros and cons. Those who favor cap and trade value its long term environmental promises, economic incentives (allowances and allowance auctions), and efficiency. On the other hand, those appreciate carbon taxes because of their simplicity, promising tax revenue, and market certainty. Fans of cap and trade and carbon taxes, like David Victor and Avi-Yonah & Uhlmann respectively, view their favored strategy…show more content…
They can also be traded, hence the name. If a company remains under their emission cap, they’re permitted to sell their remaining allowances in a cap and trade market. In a carbon tax situation, companies are urged to reduce emissions because of the tax- industries don’t want to be taxed, so they are incentivized to reduce emissions. Another important similarity between the both is “the cost of emissions abatement” equating “the common emissions price” (Goulder & Schein 2013). This means that, if companies are incentivized enough, they will inevitably lower their carbon emissions, which will allow their costs of abatement to equal their revenue. Cap and trade systems accomplish this goal differently than carbon taxes, but they still nonetheless arrive at the same point. A third benefit of composing a hybrid between cap and trade systems and carbon taxes is the mechanism in which both mitigate international competition. Border adjustments could take place, which would alleviate the strain of international competition. Both methods can apply border adjustments. Despite this, as Goulder & Schein admit, this could pose many problems such as the lack of tax identification information and complexity involved. Because of this, downstream methods have instead been considered with, usually, cap and trade systems. Downstreaming methods would eliminate the need for border adjustments, because
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