Brief summary of two kinds of emission trading schemes- carbon tax and cap and trade.

1. Emission Trading
By Herui Song

2. *NEWS!
Trump Administration Sues
California over Cap-and-Trade
with Canada…
- “California overstepped its
legal authority…
undermines the president’s
ability to negotiate
competitive agreements
with other nations…” (LA
Times)

5. Ways to reduce carbon emissions...
1. Carbon tax system
2. Cap and Trade system

6. Level of adoption of carbon pricing initiatives implemented/scheduled

7. 1. Carbon Tax System?
Ambitious Carbon Pricing Requires High
Political Trust & Low Corruption Level.
- Finland, Norway, Sweden, Switzerland:
high political trust, carbon prices above
40$/tCO2
.
Have diffused benefits and concentrated costs
- Carbon intensive companies are more
likely to oppose it than beneficiaries to
support it.

8. Real World Schemes
Alberta (Canada)
- Revenue split between green
spending and compensation for those
who are disproportionately affected…
British Columbia
- Revenues go to households and firms,
enjoyed broad political acceptance.
Australia
- Introduced in 2012 but abolished in
2014, demonstrated that price design
that meets equity is not sufficient,
while political communication is also
crucial.
(Our World In Data)
Image: Revenue Neutrality of BC’s Carbon Tax...

9. Economic Effect of a carbon tax(If implemented in US)
Revenue: CBO estimated only cap-and-trade program that would have a set price of 20$/tCO2
in 2012, could raise a total of 1.2 trillion dollars in its first decade.
Ultimately, it could…
- Increase the cost of producing goods and services
- Diminishing purchase power
- Cost not evenly distributed among households
How to use the revenue?
- Reduce deficits… would offset part of the negative economic impact.
- Cut marginal tax rates… “tax swap”, increase incentives to work.
- Reduce effects on disproportionately affected groups… would not decrease total costs.
https://www.brookings.edu/wp-content/uploads/2019/03/On-the-Economics-of-a-Carbon-Tax
-for-the-United-States.pdf (Feb 2019)
https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/Carbon_One-Colum
n.pdf (May 2013)

10. 2. “Cap-and-Trade” System
Under a cap-and-trade program, laws or
regulations would limit or ‘cap’ carbon emissions
from particular sectors of the economy (or the
whole economy) and issue allowances (or
permits to emit carbon) to match the cap.
Every source of emissions subject to the cap (for
example, power plants or refineries) would be
required to hold allowances equal to the
emissions they produce.
Once these entities have allowances, they would
be able to trade or sell allowances freely among
themselves or other eligible market participants.

11. Continued.
- Carbon (Dioxide) trading
- To combat climate change and
reduce greenhouse gas emissions.
- “The government distributes a
limited number of tradable
allowances, and then obliges
participants to surrender
allowances to match their
emissions. The market for
allowances generates a carbon
price in response to supply and
demand, and each participant is
free to react to this carbon price as
individually appropriate.”

12. Economic Impact
Cost effective abatement
- incentive to shift to low carbon
economy due to the market carbon
price.
- efficient abatement efforts (some
company abate more and sell
allowances to other companies)
- Firm EU ETS: passing through costs to
customers and labor productivity
Decoupling emissions from economic growth
- more economic output generated per
ton of carbon emissions
e.x. California: carbon intensity of economy fallen
by 33% while economy has grown by 37% since
the peak of 2001. (figure shown above)
- Revenue Generating
Fiscal revenue: by the end of 2017, ETS
worldwide generated revenue about USD 37
billion.
Revenue could be designated to fund researches
Compensate for low income households

13. Country Examples - New Zealand
New Zealand
The system only includes every second tonne of
carbon emitted, but covers a wide range of
sectors including agriculture, energy, liquid
transport fuels, and waste. It also rewards
sectors such as forestry with credits for
absorbing CO2 from the atmosphere.

14. EU ETS
Operates in 31 EU countries.
Emissions fell slightly over 8% in
2018 compared to 2013, reduced
22% since 1990 while the economy
grew over 58%.
Goal is to reduce 21% by 2020 from
the 2004 levels. During 2021-2030,
it will be an annual reduction of 2.2%
as of the 2030 targets.
Country Examples - EU

15. Compare and Contrast
Some similarities…
- Correct a market failure. (Negative
externalities cause by over emission of
GHG).
- Generates a market carbon price.
- Generates revenue.
- Impose a compliance obligation on firms
Some differences…
- Cap and trade reaches a environmental
goal while reduction of GHG is not
predetermined with carbon tax (which is
why Cap and Trade is more popular).
- Under Cap and Trade system, more
flexibility is provided to a single firm
because it allows them to make decisions
on a multi-year basis.

16. Takeaways
Economically, the emission of Greenhouse Gases causes a market failure because it generates negative
externalities as the emission passes social optimal line, causing harm to the society.
Environmentally, I believe that the existence of such system is necessary to regulate and reduce
emissions. I personally prefer the cap-and-trade system. It generates a carbon price based on the market.
It is more practical in reaching the environmental goal than simply put a carbon price. It also gave
individual firms more incentive to reduce the emission.
China is one of the biggest developing countries in the world right now. China is now considering the
implementation of a cap-and-trade system, and according to news, it will be the biggest of its kind. I
definitely support this decision. In China, especially in big cities, most of the days there will be some
pollution in the air, whether light or heavy. It is not uncommon to have serious smog. Therefore, limiting
the emission of GHGs will definitely help in some way to reduce it, while not impeding the growth of
economy.
Background: Smog in Beijing, China, 2018.