UN delegates met last week in New York to further discuss the Paris Climate Accord initiated in December. The world’s two largest financial institutions are pushing national leaders to price the carbon emitted in their respective countries, either through a carbon tax or cap-and-trade. The article I read this in didn’t say that the banks favored one or the other (1), and neither do their webpages on carbon pricing.(3, 4). I thought this was interesting, because the two strategies, while they both price carbon, operate fairly differently and can lead to different results. As a means to achieve a certain level of GHG emissions, I’ve never understood the appeal of a carbon tax. It requires regulators to figure out what the price of carbon should be, so that the desired emissions levels are reached. Instead, in a cap-and-trade system, regulators set a cap on what emissions should be, and leave the market to figure out the price through supply and demand of allowances.
Although I am undoubtedly simplifying this to the argument’s detriment, with a carbon tax, a political body must rely on both the expertise of climatologists to pick a GHG emissions reduction goal that will ward off the worst of climate change’s effects and the expertise of economists to pick how high the tax should be to reach that goal. With cap-and-trade, you get to bypass the economists in that regard entirely. Although, if similar revenues are to be generated under cap-and-trade as under a carbon tax, economists are still very necessary in picking auction floor prices, whereas a carbon auction is not part of a carbon tax. I dunno! I have to read more about both of them.
- http://www.nytimes.com/2016/04/24/us/politics/carbon-pricingbecomes-a-cause-for-the-world-bank-and-imf.html?ref=politics
- http://www.imf.org/external/np/exr/facts/enviro.htm
- http://www.worldbank.org/en/programs/pricing-carbon