Carbon Tax or Cap and Trade?

• Which carbon pricing system is better?

  • Depends on the

    • Design

    • Implementation

  • Advantages of carbon tax

    • Carbon price predictability

    • Ease and quickness of implementation

    • Low administrative costs

  • Advantages of cap and trade

    • Clear emissions reduction target

    • Cost-effective (emissions reduction at lowest cost)

    • Built-in responsiveness to inflation, cost changes & recessions

    • Politically more palatable

  • Disadvantages of carbon tax

    • No emissions certainty; difficult to estimate right carbon tax rate

    • Less politically palatable

      • Increasing tax politically difficult

  • Disadvantages of cap and trade

    • Complex system; more time consuming to set up

    • Requires emissions monitoring

    • Carbon price/permit price uncertainty; may lead to price volatility

    • Fails to take advantage of low-cost opportunities to cut more emissions

  • Other advantages and disadvantages are listed at http://pricecarbonnow.org/comparing-carbon-pricing-options and were debated by  John Doggett and Jim Nolan of McCoombs of School of Business at the University of Texas at Austin (clip below). For other clips of experts discussing merits and demerits of different carbon pricing systems, please visit our Youtube channel: https://www.youtube.com/channel/UC_taEyAgS8JwOXlKtMhnrAQ

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