Carbon Taxes Versus Emissions Trading: A Comparison of Two Greenhouse Gas Policies
As the world faces a growing threat of the climate change, the role of environmental policies in industrial countries becomes more and more important. How to approach against a prevention or mitigation of effects from the climate change is different from countries; however, every country aims to reduce emissions of a greenhouse gas (GHG), represented by Carbon Dioxide (CO2), because an increasing concentration of a GHG in the air is the largest contributor to the climate change. Emissions of a GHG is basically delivered by energy consumptions in economic activities from driving a car to refining steel, so a country’s environmental strategies tries to control such activities with regulations and, consequently, promote technological innovations by which its economy can run with less energy. Among a number of methodology in regulations of GHG emissions, carbon taxes and emissions trading are major GHG policies implemented by some industrial countries; the former is introduced by some European countries like Germany; the latter’s famous example is the European Union Emission Trading Scheme. In this essay, these GHG policies are compared and contrasted with following four criteria: efficiency of emissions reductions, policy operation costs, promotion of technical innovations, and equity among policy objects.
First of all, concepts and structures of each political methods need to be briefly explained before proceeding to a comparison. Carbon taxes are imposed on consumptions of whatever goods emit a greenhouse gas, for example, gasoline, and its policy structure is similar to other taxation; a fixed tax rate is fully operated by a government and provide it with revenue. On the other hand, emissions trading is oriented to major GHG emitters, such as power plants or automobile companies. Once a government assigns an emissions unit to each of those emitters, a right to pollute can be traded between them, and a price for the unit is decided by a market mechanism.
From a viewpoint of efficiency of emissions reductions, both carbon taxes and emissions trading are effective, although there are differences in how each policy works. If a country’s government implements a carbon tax policy, a certain percentage is added on fuel prices, based on the carbon content of fuels, and results in saving fuels in both industrial and individual level. Furthermore, tax revenue can be devoted to its own operation or other environmental policies. In emissions trading, GHG emissions reductions can be achieved with a minimum cost because the unit of emitters whose costs to reduce emissions are relatively low will be sold to other emitters for whom emissions reductions are difficult like thermal power plants (Baumert).
Both policies are also similar in their inevitability of operation costs. In taxation, a new correction system needs to be designed into a suitable form for the fuel distribution; also, it is difficult to estimate an appropriate tax rate which can promote saving fuels without causing serious stagnation. Similarly, emissions trading needs investigations on GHG emissions histories in each major polluters in order to allocate the maximum amount of emissions fairly among them.
However, when it comes to promotion of technical innovations, carbon taxes are more advantageous than emissions trading in a long-term observation of policies. According to Stiglitz, in carbon taxes, costs for GHG emissions are fixed, which provides people with permanent incentives to improve productivity in use of fuels and accordingly stimulate investments into energy technology. In contrast, the price for a right to pollute is floating in emissions trading because, firstly, it is determined by balance of demand and supply, and secondly speculation makes it less stable. This suggests no matter how much you invest on green technology, once the price get down, you can just buy some emission units to meet a government’s request (Stiglitz, par. 3).
Contrarily, emissions trading secures equity among policy participants, if assumed that emissions units are fairly allocated, while carbon taxes work differently from taxation objects. In the former system, current emissions of each players are considered, and players can adapt their behaviors corresponding to their ability to reduce emissions: buy or sell. In comparison, the latter system imposes a progressive burden corresponding to contributions of GHG emissions, which means disadvantageous for some business fields like the steel industry.
Finally, consider these factors comprehensibly and evaluate feasibility of both policies. In terms of efficiency of emissions reductions and operation costs, there is no significant difference between carbon taxes and emissions trading; however, carbon taxes are slightly more favorable because they work not only on industries but also on individuals and create an additional budget for a government. In promotion of innovations, taxes are advantageous as well. Nevertheless, carbon taxes are expected to face a strong opposition by some industries with inevitability of emitting a large amount of greenhouse gases. For example, Australian government had struggled in introducing a carbon tax act until its parliament succeeded to pass it in 2011, because coal and steel industries are strong in the country (Curran & Brindal).
In conclusion, this essay analysed two policies related to GHG emissions mitigation: carbon taxes and emissions trading, focusing on four argument points and later putting them together into consideration. As a conclusion, carbon taxes are more effective than emissions trading in three criteria except equity, but it seems a controversial policy in the economy where mineral industries are dominant.
References
Baumert, K. 1998. Carbon Taxes vs. Emissions Trading. Retrieved May 11, 2012.
Stiglitz J.E. 2010. Overcoming the Copenhagen failure. Retrieved May 11, 2012.
Curran, E. and Brindal, R. 2011. Australia’s Carbon Tax Clears Final Hurdle. Retrieved May 11, 2012.
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