Carbon Fee vs. Cap and Trade Laser Talk

Cap and trade is our second favorite solution. We prefer a straightforward fee because it takes no time to set up and requires no additional bureaucracy. It’s easy to understand and monitor. A carbon fee sends a predictable price signal that is not subject to market fluctuations which enables businesses and consumers to plan their energy investments. Politically, Republicans have been opposed to the cap because it adds government bureaucracy while Democrats are opposed to trading because it could cause fluctuations in the price of energy, causing poor people to pay a disproportionately higher percentage of their income for energy and therefore Democrats think it treats them unfairly.

Harmonizing Internationally

The current European Union cap-and-trade system places a price on permits so low that it has no impact on emissions [1]. Also, the problem of climate change is worldwide and an approach is needed that can accommodate the needs of emerging economies. A fee more easily lends itself to border adjustments between countries with different or no carbon fees, enabling agreements that can be harmonized worldwide. Sweden imposed a carbon tax in 1991, which is now $150 per tonne, a pretty hefty price. Since that time they have had a reduction in emissions while the economy has grown by 48%, demonstrating that a substantial fee is effective in reducing emissions without harming the economy [2].

Skeptic Claims and One-Liners

Carbon Fee Skeptic Claim: Pricing carbon without a cap or targets won’t make a difference.
One-Liner: The majority of economists, from both ends of the political spectrum, agree that pricing carbon will result in less carbon being burned.[3-6]

Carbon Fee Skeptic Claim: Cap-and-trade worked for acid rain emissions.
One-Liner: Carbon emissions are different. There are so many sources and the investments needed are so big that price certainty is much more important.

  1. Walsh, Bryan. “If Carbon Markets Can’t Work in Europe, Can They Work Anywhere?”. April 17, 2013.
  2. “Where Carbon is Taxed”. May 6, 2013. The Carbon Tax Center.
  3. Mankiw, Greg. Rogoff joins the Pigou Club. Posted: Sept 16, 2006. Greg Mankiw’s Blog.
  4. Nordhaus, William D. “Rolling the ‘DICE’: An optimal transition path for controlling greenhouse gases”. 1993. Resource and Energy Economics, 15, 27-50. doi:10.1016/0928-7655(93)90017-O
  5. Nordhaus, William D. “Economic aspects of global warming in a post-Copenhagen environment.” 2010. PNAS, 107(26). doi: 10.1073/pnas.1005985107
  6. Speck, Stefan. “Carbon taxation: two decades of experience and future prospects.” 2013. Carbon Management. 4, pp. 171-183. doi: 10.4155/CMT.12.81

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