Argument: A carbon tax provides superior incentives for green innovation

Issue Report: Cap-and-trade versus carbon tax


“Doffing the cap”. The Economist. 12 June 2007: “some economists reckon that a cap-and-trade system produces fewer incentives than a carbon tax for climate-friendly innovation. A tax provides a clear price floor for carbon and hence a minimum return for any innovation. Under a cap-and-trade system, in contrast, an invention that reduced the cost of cutting carbon emissions could itself push down the price of permits, reducing investors’ returns. To avoid these pitfalls, some cap-and-trade advocates want to set price floors and ceilings within carbon-trading systems. One of the most prominent bills in America’s Congress, for instance, includes a “safety valve”. If the price of carbon rises beyond a threshold, the government will allocate an unlimited supply of permits at that price. Such reforms, in effect, make a cap-and-trade system work more like a carbon tax.”