By Fraser Perkins —
There are two main mechanisms for reducing CO2 emissions: cap-and-trade and carbon taxation.
As the name suggests there are two components – a cap on total emissions and a trading ability. The government establishes a set limit on CO2 emissions and divides this limit into allowances, one per ton of CO2. Companies are then issued or may purchase at auction the allowances to run their business. Companies respond by lowering CO2 emissions and may sell any unused allowances to other companies, or bank them for future use. Over time the allowance can be lowered, reducing CO2 emissions at a predictable rate. The downside is additional regulation and governmental oversight.
A carbon tax or fee system establishes a set price for every ton of CO2 emitted. A governmental agency collects the fees and may choose to either use them for general expenditures or rebate them to the public at regular intervals. The Citizens’ Climate Lobby (CCL) recommends an initial carbon fee of $15/ton and the ability to raise the fee by $10/year. Since 100 gallons of gasoline generates one ton of CO2 emissions, the fee for one gallon of gasoline in year one would be $0.15. For a car which gets 25 mpg, the carbon tax works out to .6 cents per mile the first year. CCL also recommends public rebates of funds collected and estimates that 85% of households would be fully reimbursed for any carbon taxes they pay. The downside is that companies may simply choose to pay the fine and fail to reduce their CO2 footprint. The initial CCL carbon tax is low and most likely will need to be increased in order to spur change.
Both mechanisms work but require careful planning. A cap-and-trade program ensures that predetermined goals are met, but at the cost of regulatory oversight. A carbon fee system doesn’t guarantee a specific goal but provides a predictable regulatory environment.
Some groups support cap-and-trade, while others support a carbon tax.
CCL supports a carbon tax.
Environmental Defense Fund supports cap-and-trade.
Overriding the pros and cons of each strategy is the need to implement a comprehensive program as quickly as possible, and not allow fossil fuel industries to “divide and conquer” advocates for decarbonization.