Cap and Trade versus Carbon Tax

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The climate-change debate has shifted, claim Eileen Claussen and Judith Greenwald of the Pew Center on Global Climate Change in a July 2007 article for the Miami Herald.

There is no longer any argument about whether or not the world is warming and whether or not this is a problem, as it “clearly is”, claim the authors – calling for the focus of the debate to turn to how to address the reality of climate change. 

The US Congress is “moving towards” introducing a cap-and trade-programme to limit greenhouse-gas emissions, though several commentators believe a carbon tax to be preferable, the article outlines. 

Advocates of a carbon tax believe that it would be simpler and that the EU experience shows that the cap-and-trade approach has failed, but the authors insist that both of these arguments are wrong. 

Claussen and Greenwald claim that Europe’s cap-and-trade system has been a “major success”, covering more than 10,000 sources and a robust trading market with millions of transactions per month. 

Moreover, they point out that cap-and-trade is the Union’s “primary means” of complying with the Kyoto Protocol. 

During the initial ‘learning phase’, the authors claim that the EU learned that its emissions data were “flawed”, in that companies could reap profits by reducing emissions much more cheaply than anticipated. As a result, the EU is “rapidly improving” its emission data. 

In response to criticism that the ETS has not yet made significant progress, they counter that the Commission is “not trying to reduce emissions yet”, instead concentrating on “getting the system up and running”. 

The authors outline “important advantages” that cap-and-trade has over a carbon tax, namely that it is “more flexible” in that one system can be linked to other systems around the world, offering many advantages to multinational companies trading in diverse countries. Moreover, emission allowances can be “banked”, allowing for early reduction emissions and saving allowances for later. 

For Claussen and Greenwald, the key difference between the two is that a tax provides for cost certainty, whereas cap-and-trade provides for environmental certainty. 

They conclude that environmental certainty is the “more compelling imperative” and thus support cap and trade, adding that a carbon tax would be “awfully hard to get through Congress”. 

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