Argument: Cap-and-trade systems ensure emissions reductions to the set cap

Issue Report: Carbon emissions trading


A post made on economist Greg Mankiw’s Blog 4/11/07 – “With the cap-and-trade system, there will be a definite decrease in emissions, while with the tax, the decrease depends on whether the cost of cutting emissions is lower than the potential tax. If it is, emissions decrease, if not, there is no effect.”

Eileen Claussen (president of the Pew Center on Global Climate Change) and Judith Greenwald (director of innovative solutions at the Pew Center), “Handling Climate Change”, Miami Herald, 7/12/07 – “The key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What’s fixed is the cap itself — and it is based on an assessment of the level of emissions you need to get to in order to protect the climate. In response to a carbon tax, many emitters will reduce their emissions rather than pay the tax, but that result is not guaranteed. With Alaska and Greenland melting, and with droughts and other weather extremes on the rise, environmental certainty would seem to be the more compelling imperative.”

One commentator writes, “With cap-and-trade, you know the emissions but don’t know the cost. With a tax, you know the cost but don’t know the emissions.”[1]

Felix Salmon. “The Carbon Tax Debate: Why a Cap-and-Trade System is Better”. Portfolio. 13 Nov. 2007 – “A carbon tax might be raised or lowered, but it will remain a carbon tax. A cap-and-trade system, by contrast, would be much more flexible. At the outset, it might behave quite similarly to a carbon tax, targeting carbon prices rather than emissions reductions. But if you used a cap-and-trade system to do that, it would me much, much easier to move over time to a system which targeted emission reductions rather than carbon prices.

This was one of Jon Anda’s main points. Any successful policy, he said, has to at least keep open the possibility that we will choose in future to restrict global warming to 2 degrees celsius more than pre-industrial levels. It’s entirely possible that scientists investigating feedback loops will discover that any warming above that level would be catastrophic. We don’t know. But only a cap-and-trade system would create a mechanism which would make that possibility achievable. “I don’t want to tell my grandchildren that we tried taxing CO2 and it didn’t do much good, and sorry,” he said.

Anda even came prepared with a (not very catchy) slogan: a successful policy, he said, “has to be a dynamic hedge of fat-tail CO2 risk”. If it turns out that our carbon emissions are rising too far, too fast – or not falling fast enough – then the system has to be able to dymaically adjust to that, and that’s something a carbon tax finds pretty much impossible to do.