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 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 ones 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, who grab a piece of the pie. 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] covers more emissions and avoids loopholes. Since the fee is applied at the source, it can cover all fossil fuels and all 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 opportunity for companies to argue over whose emissions gets covered or how big the cap should be. There’s no need to monitor smokestacks. There are no middlemen to bleed off money, 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 lends itself more easily to policy alignment between nations. Administrative costs for both government and industry are far less.

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

In a Nutshell: Placing a predictable fee on carbon is less confusing to administer than cap-and-trade. It covers all fossil fuels and all emitters, no matter how large or small. It avoids price volatility, market manipulation, and the need to monitor smokestacks. 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. “Carbon Tax Basics.” Center for Climate and Energy Solutions. (accessed 12 Mar 2018).

This page was last updated on 05/05/21 at 18:15 CDT.