Carbon Fee versus Cap and Trade

Carbon Fee versus Cap and Trade

Laser Talk

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 bit of 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] as generally practiced only covers polluters above a certain size. It requires bureaucracy to select which companies get covered, and then allocate carbon allowances to each one. Their CO2 emissions must be measured, reported, and verified. Covered companies can buy and sell allowances, but the price is bid up and down by market traders, who grab a piece of the pie. This creates uncertainty for businesses and investors, stalling decisions to undertake the big projects needed to slash emissions. Another sore point is the use of ‘offsets,’ [3] which allows large facilities to continue polluting in exchange for funding some faraway tree planting or renewable energy.

A carbon fee [4] can cover more emissions and minimize loopholes. Since the fee is applied at the source, it can cover all fossil fuels emitters regardless of size. The tons of carbon are easy to measure and verify. Because it’s the fuel that gets priced, there’s no need for debate over individual company allocations. There are no middlemen to bleed off money from tradeable allowances . It creates a steady, predictable price signal, so businesses and consumers can plan their energy investments. It lends itself more easily to policy alignment between nations. .

Cap and trade is said to be ‘market-friendly,’ but a carbon fee also fits that description, with more emissions covered, less bureaucracy, lower costs, and more predictability.

In a Nutshell: Placing a predictable fee on carbon is less complex to administer than most cap-and-trade designs. It would cover all fossil fuel emitters, no matter how large or small. It would avoid price volatility, market manipulation, and the need for emissions tracking. It also lends itself to policy alignment between nations.

  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. Gurgel, A. “Carbon Offsets.” MIT Climate Portal (11 Sep 2020).
  4. “Carbon Tax Basics.” Center for Climate and Energy Solutions. (accessed 12 Mar 2018).

This page was last updated on 07/20/22 at 13:15 CDT.