Carbon Fee versus Cap and Trade

Laser Talk

This page was updated on 10/15/18 15:56 CDT.

Question:  Why a carbon fee? What’s wrong with cap and trade instead?

Answer:  Cap and trade has worked well for pollutants like sulfur gases,[1] but carbon is a different story. Unlike sulfur — an unwanted contaminant — carbon is what gives a fuel most of its energy. It’s emitted not just from huge power plants, but from a billion smaller sources all the way down to your backyard gas grill.

Cap and trade [2] can only cover large polluters, leaving millions of small sources untouched. It requires bureaucracy to select which companies get covered, and then allocate carbon allowances to each one. Their emissions must be measured, reported, and verified. The covered companies can buy and sell allowances, but the price is bid up and down by market traders, adding another layer of cost. The resulting price volatility creates uncertainty for businesses and investors, stalling decisions to undertake the big projects needed to slash emissions.

A Carbon Fee [3] is far simpler. Since the fee is applied at the source, it can cover all fossil fuels and all emitters regardless of size. It’s easy to understand and monitor. Because it’s the fuel that gets priced, there’s no squabbling over which company gets a cap or how big it should be. There’s no need to monitor smokestacks. There are no middlemen and no tradeable allowances or financial instruments subject to speculation and market manipulation. It creates a steady, predictable price signal, so businesses and consumers can plan their energy investments. It more easily lends itself to cross-border policy alignment. Administrative cost for both government and industry is far less.

Cap and trade proponents tout their policy as ‘market-friendly,’ but a Carbon Fee fits that description better, with less bureaucracy, lower costs, and more predictability.

  1. “Acid Rain Program.” U.S. Environmental Protection Agency. (16 May 2017).
  2. “Cap and Trade Basics.” Center for Climate and Energy Solutions. (accessed 12 Mar 2018).
  3. “Carbon Tax Basics.” Center for Climate and Energy Solutions. (accessed 12 Mar 2018).

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