Cap and trade program design options facebook


Both can generate revenue. A tax by definition is designed to raise revenue, but a cap-and-trade system, to the extent that allowances are auctioned, can also raise similar amounts of revenue. How such revenues are used becomes an important issue in both systems. Some proposals rebate the revenue directly back to consumers, some use part of the revenues to ease the transition to a low carbon economy e.

Both impose a compliance obligation on a limited number of firms. Depending on who pays the tax or is responsible for holding allowances, the number of firms directly impacted by these systems can be large or small.

Most proposals focus on a limited number of firms with the goal of maximizing emissions coverage and reducing administrative costs. Both necessitate special provisions to minimize adverse impacts. By putting a price on carbon, both systems raise concerns about adverse impacts on energy-intensive firms and manufacturing states, and on workers and communities that historically have been dependent on fossil fuels. For example, both could result in large wealth transfers from coal and manufacturing states to other parts of the country.

However, through special tax provisions or the use of allowance value, either can be designed in a way to mitigate adverse impacts on disadvantaged groups. Similarly, both systems would require special provisions to avoid imposing requirements on GHGs that are consumed as feedstocks or to provide credit for reductions that result from capturing and storing carbon or expanding carbon sinks.

Both require monitoring, reporting and verification. Both systems require similar data on emissions, reporting and verification of that data, and enforcement in the event of noncompliance.

By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces. In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces.

Compliance flexibility for firms. A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay. Under a cap-and-trade system, borrowing, banking and extended compliance periods allow firms the flexibility to make compliance planning decisions on a multi-year basis.

Impact of economic conditions. Under a cap-and-trade system, reduced economic growth would lower allowance prices. Under a tax, government action to lower the amount of the tax, not market forces, would be required to reduce the carbon price seen by firms.

In times of economic expansion, the opposite would be true — under cap and trade, allowance prices would rise based on market forces, but taxes would remain the same unless adjusted through government action.

In this sense, cap and trade can be seen as providing a self-adjusting price, high when the economy is doing well and low when the economy is in a downturn.

A tax in contrast is not self-adjusting. Linkage to other systems. Ideally, a global price for carbon would develop and allow cost efficiencies to be realized across borders. Both correct a market failure. Both cap and trade and a tax have as their objective the correction of an existing market failure.

Currently, sources responsible for GHG emissions do not have to pay for the damages they impose on society as a whole. The failure to internalize these costs leads to greater levels of emissions than would be socially optimal. Both put a price on carbon. By placing a price on carbon, and thus correcting the market failure, both approaches create an incentive to develop and invest in energy-saving technologies.

This will encourage the shift to a lower carbon economy. Both take advantage of market efficiencies. Unlike direct regulations, both harness market forces to achieve the lowest cost reductions in GHG emissions.

Both can generate revenue. A tax by definition is designed to raise revenue, but a cap-and-trade system, to the extent that allowances are auctioned, can also raise similar amounts of revenue. How such revenues are used becomes an important issue in both systems. Some proposals rebate the revenue directly back to consumers, some use part of the revenues to ease the transition to a low carbon economy e.

Both impose a compliance obligation on a limited number of firms. Depending on who pays the tax or is responsible for holding allowances, the number of firms directly impacted by these systems can be large or small.

Most proposals focus on a limited number of firms with the goal of maximizing emissions coverage and reducing administrative costs. Both necessitate special provisions to minimize adverse impacts.

By putting a price on carbon, both systems raise concerns about adverse impacts on energy-intensive firms and manufacturing states, and on workers and communities that historically have been dependent on fossil fuels. For example, both could result in large wealth transfers from coal and manufacturing states to other parts of the country. However, through special tax provisions or the use of allowance value, either can be designed in a way to mitigate adverse impacts on disadvantaged groups.

Similarly, both systems would require special provisions to avoid imposing requirements on GHGs that are consumed as feedstocks or to provide credit for reductions that result from capturing and storing carbon or expanding carbon sinks. Both require monitoring, reporting and verification. Both systems require similar data on emissions, reporting and verification of that data, and enforcement in the event of noncompliance. By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces.

In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces. Compliance flexibility for firms. A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay.