Carbon Tax or Cap-and-Trade? Why Not Both?

Posted on June 26, 2008

Climate change is here. Governments have one foot on the deck and are deciding exactly how they’re going to follow through with the other. The possibilities so far are two. I would like to suggest a third – a combination. A Carbon Tax and Cap-and Trade can accommodate each other to greater effect.

Advantages of both

Cap-and-trade sets a limit on total emissions and thus establishes vital atmospheric certainty. Tax ensures that there are inescapable costs attached to emission. Cap-and-trade rewards carbon sinks. Tax is transparent.

Disadvantages of both

In tax it seems that setting a total emissions limit is not plausible. In cap-and-trade it seems that permits will be issued according to subjectively determined policy, susceptible to malign influence and populist business-as-usual handicaps.

In both models special-interests will likely receive favor in the absence of large-scale, established renewable energy industries such as wind, wave and solar power. However it seems that there are more chances for malign influence under the cap-and-trade model than under the tax model. But a cap is integral. Additionally, renewable energy industries need greater investment and subsidy before they can match the influence of the old players. Should a tax be levied on emission for this purpose?

Arguments from both sides are convincing, yet the two models don’t seem to be mutually exclusive.

A combination

Seeing as the emission accounting systems would be basically the same for both models, it is practically feasible to combine them. A cap is necessary to ensure that global emissions targets are met. A tax is necessary, to make sure that there is a cost attached to polluting the atmosphere.

(This entry stays at the conceptual level by the way. I will go into more depth in later entires, adding hyperlinks to this entry.)

Background reading…
The Real Climate Debate: To Cap or to Tax?