Cap And Trade System

Another marketing instrument besides a carbon tax is a cap and trade system. To define a cap and trade system, Economist Keohane states in his article, “Total allowable emissions are limited, and an equivalent number of allowances are created, which may be bought or sold on a market. Each facility’s emissions are monitored and recorded; at the end of a compliance period, each facility must hand over an equivalent number of allowances to the government. A firm seeking to minimize its cost of complying with the program will abate pollution until its marginal cost equals the market price of an allowance. As a result, in theory, cap and trade programs are cost-effective.” Robert Stavins also shares this same belief that the more efficient climate …show more content…
In Lawrence Goulder’s article, “Carbon Taxes Versus Cap And Trade: A Critical Review”, Goulder quickly eliminates the idea that a carbon tax approach is better than a cap and trade system and vice versa. He states that, “the performance of the two approaches depends critically on specifics of design. Indeed, the design of the instrument may be as important as the choice between the two instruments.” Another economist that refutes the idea that one instrument is better than the other is Ian Parry, “Notwithstanding our claim that no single instrument is superior to all others in all settings.” To back up his argument, Goulder argues that administration costs are more cost effective in one policy than in the other. However, both policies can be implemented either upstream or downstream. This means that the government can choose whether to place the tax on the producers or the consumers. Consequently, this eliminates the idea that one policy is more cost effective than the other since it really depends on how the policy is structured. While both Nordhaus and Stavins agree on price volatility being an issue in a tax approach or a quantity approach, Goulder offers his own opinion of combining both policies in order to reduce price volatility. Goulder argues that a cap and trade system with a price ceiling or floor would be the best form of action to combat price volatility. With a price …show more content…
Furthermore, economists such as McKibbin offer his suggestion on the topic of a hybrid approach stating that, “it creates incentives for governments to monitor and to enforce the policy within their own borders. It is a practical policy that would reduce greenhouse gases in a cost-effective manner.” In my opinion, a hybrid approach is the most efficient approach because in today’s world we need to respond fast to changes in the environment and be able to adapt to them. The cost of environmental policy should not be as important as mitigating the damages that global warming is going to do to society in the future. The table below displays the results of Goulder’s research, and clearly the hybrid or carbon tax is more beneficial approach. However, why not use both market instruments if they are readily