White Paper: Cap and Trade versus a Carbon Tax

Tue, 07/07/2009 - 00:00

Executive Summary:

This research paper focuses on the arguments between cap and trade versus a carbon tax. A literature survey of over fifty news and web articles, and opinion pieces were used. This issue is fast changing in public policy as a cap and trade system has gained political ground. A carbon tax would be much more effective in reducing carbon emissions, so we must work now to influence our policy-makers to take this route. 

The term “cap and trade” refers to a system that places limits on carbon emissions. If a utility can’t meet the imposed cap on carbon emissions, in the cap and trade system it can purchase additional permits from companies who are operating below the cap. Over time, the carbon cap would be lowered. This is supposed to raise the cost of emitting carbon and thus create an incentive for operating by using renewable power. In a cap and trade system, emission permits could be auctioned off. The revenue from the auctions could be used to give rebates or to reduce other taxes, partially offsetting higherprices. One big argument for the cap and trade system is that it is business-friendly and will produce jobs. 

A carbon tax is just what it sounds like—a tax on carbon emissions, which would put an immediate monetary price on carbon dioxide pollution. Characteristics of a carbon can include gradual incremental increases toincentivize greater reduction in emissions, revenue-neutrality, and rebates of revenues to taxpayers. 

The public interest does not appear to be served by a cap and trade system for several reasons, which include price volatility, the gaming that would become inherent in the system, and the lack of adequate accountability. Also, as mentioned previously, while a cap and trade system is supposed to be business-friendly, not all businesses are for the idea, and both conservative and liberal economists prefer a carbon tax over a cap and trade system. 

The American Clean Energy and Security Act, or more simply, the Waxman-Markey bill, which is legislation for a cap and trade system, is currently working its way through Congress. Given the problematic nature of a cap and trade system versus the simplicity and efficacy of a carbon tax system, supporting a bad bill is worse than scrapping it and starting over because, given how imperative it is we reduce emissions ata steady rate, it is important we start the procedure in the right way. We also need more than just a carbon tax; we also need complementary policies such as a national Energy Efficiency Resource Standard (EERS) and a Renewable Energy Standard (RES) in order to facilitate the kind of real permanent change we need to see. 

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