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 Economics vs. global warming: Carbon tax vs. cap-and-trade!
POSTED 4 DECEMBER 2008

Meet the contenders

The two front-running economic systems for controlling the greenhouse gas carbon dioxide use different methods to cool global warming:

Carbon tax. The government taxes fossil fuels (and ideally other carbon dioxide sources) to raise the price of high-carbon energy, causing buyers to shift to lower-carbon sources, and therefore reducing carbon dioxide pollution. The carbon tax could be offset by other tax cuts, or be spent on energy conservation and research.

Cap-and-trade. To release a ton of carbon dioxide, you need one permit, which are bought and sold on a commodity market. If you find a cheap way to reduce carbon dioxide, you can sell me your extra permits and profit from my profligacy. The cap-and-trade market supposedly "finds" the cheapest reductions without government interference, cutting the price of fighting global warming.

Both systems can be:

Adjustable. The number of emission permits, or the per-ton carbon levy, can be changed to speed or slow greenhouse-gas reductions as necessary.

Ubiquitous. The system can be designed to control all large sources of carbon dioxide, and also other key greenhouse gases like methane.

Non-prescriptive. Individuals and businesses are not directed how to reduce carbon dioxide emissions, but instead get an incentive (carbon tax) or an incentive plus an upper limit (cap-and-trade permits), and then choose their own route to reduction. (Traditional pollution rules, which set an upper limit on what each business can spew, could pose a regulatory nightmare for the vast task of regulating carbon dioxide.)

Towering building at the end of a urban Chicago street
Photo: Nikopoley
The cap-and-trade system for reducing greenhouse gases relies on a market for carbon credits, which could be traded much like those at the Chicago Board of Trade.
Photo with low depth of field of gas pump handle nozzle
Carbon taxes could slow gasoline consumption, and retard global warming, but they would have to be much higher than gas taxes in the United States; more in line with European taxes.

Both approaches already exist in some form. Europe's high gas taxes, which are essentially carbon taxes, prove that taxes can reduce fuel consumption and therefore carbon dioxide emissions. Cap-and-trade, meanwhile, is sweeping through the European Union, which started the second phase of its Emission Trading Scheme in 2008.

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Terry Devitt, editor; Nathan Hebert, project assistant; S.V. Medaris, designer/illustrator; David Tenenbaum, feature writer; Amy Toburen, content development executive

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