Academic journal article Duke Environmental Law & Policy Forum

Experience with Carbon Taxes and Greenhouse Gas Emissions Trading Systems

Academic journal article Duke Environmental Law & Policy Forum

Experience with Carbon Taxes and Greenhouse Gas Emissions Trading Systems

Article excerpt


Whether carbon taxes or greenhouse gas (GHG) emissions trading systems (ETSs) are more effective at reducing GHG emissions has been widely debated in climate policy literature. (1) Lacking from this debate is empirical evidence documenting the performance of these instruments. This paper fills the gap by providing such evidence.

Economic theory indicates that pricing (2) GHG (3) emissions can minimize the cost to society of reducing emissions and so mitigating climate change. Carbon taxes and ETSs are two ways to price GHG emissions. A carbon tax imposes a price--the tax rate specified by the government--on each metric ton of GHGs emitted, measured as metric ton of carbon dioxide equivalent ([tCO.sub.2]e), but does not limit overall emissions. (4) A cap-and-trade system--the most common form of ETS--imposes a government-established limit on aggregate GHG emissions by specified sources, distributes tradable allowances (usually one [tCO.sub.2]e each) approximately equal to the limit, and requires regulated emitters to submit allowances equal to their actual emissions. (5) The market determines the price for allowances and thus the price per [tCO.sub.2]e emitted. A baseline-and-credit system--a less common form of ETS--specifies an absolute emissions or emissions intensity limit for each participant and allocates tradable credits ("allowances") to emitters who emit less than their limits. Emitters that exceed their limits can purchase credits from other participants to cover the excess emissions. Again, the market determines the price per [tCO.sub.2]e emitted.

A carbon tax and an ETS would yield identical results for equivalent emission reductions if there is no uncertainty regarding future prices, perfect competition in all markets, no interaction with other policies, and universal coverage (all sources of GHG emissions). In practice, the performance of carbon taxes differs from that of ETSs because these assumptions never hold. In a given jurisdiction, various factors including taxation authority, the emissions profile, and influence of large emitters can affect the choice and design of an instrument. Thus, the designs of carbon taxes and GHG ETSs, as well as their performance, vary across jurisdictions.

The performance of a carbon tax or ETS as implemented is further affected by some of the jurisdiction's other emissions-related policies, such as fuel taxes, energy efficiency standards, and renewable energy incentives. (6) External factors, such as economic recessions, fossil fuel prices, and natural disasters, (7) can affect the emission reductions achieved by a tax or ETS. (8)

This paper assesses the performance of carbon taxes and GHG ETSs operational at the end of 2015. (9) These instruments are assessed for environmental effectiveness (reduction of actual emissions), cost-effectiveness (marginal abatement cost), economic efficiency, public finance, and administrative issues. We do not make any causal claims between the observed emission reductions in a jurisdiction and its choice of policy instrument because, as noted above, many other factors affect actual emissions. The data and resources needed to disentangle the contribution of the instrument from the other factors were not available for this research. Nevertheless, useful insights can be drawn about the performance of the carbon taxes and GHG ETSs implemented to date.

The performance of many of the instruments implemented has been assessed from several different perspectives and with varying degrees of rigor, including those implemented by Alberta, British Columbia, California, Denmark, European Union ETS, Finland, Ireland, New Zealand, Norway, Regional Greenhouse Gas Initiative (RGGI), Sweden, and Switzerland. (10) In addition to assessments of individual instruments, a few studies review the performance of multiple instruments including the seven Chinese pilot ETSs, (11) ETSs for GHGs and other pollutants, (12) carbon taxes in multiple European countries, (13) and carbon taxes and GHG ETSs in eighteen jurisdictions. …

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