Question

Weigh out the pros and cons of using a carbon tax vs a carbon cap. (150-300 words)

Answer 1

CARBON TAX

PROS

1 Offers stable carbon prices enabling investors to make investment decisions without worrying about fluctuating regulatory costs.

2 If emissions reductions are cheaper than expected, then carbon tax will encourage carbon emissions reduction by a greater extent than carbon cap

3 incentivizes the development of cleaner and cost effective technology

4 easier to administrate

Cons

1 Does not ensure emissions reduction certainty as there is not predetermined target level

2 It is not that easy to change carbon tax levels frequently, as it is administratively difficult and politically divisive.

CARBON CAP

PROS

1 Setting emission caps that decline over time ensures that emissions will fall below a predetermined target level

2 the market price for emission allowances under the cap and trade system automatically adjusts with the changes in abatement costs such as fossil fuel price changes, the demand for electricity etc.

CONS

1 Does not encourage emissions reduction beyond a pre-determined target level

2 leads to overly generous allocation of emission allowances to the regulated entities

3 includes an additional administrative cost i.e. the allocation of allowances.