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Cap-and-trade vs. carbon tax: formulating an effective carbon accounting system

The world is in desperate need for a greenhouse gas accounting and reduction system that will prevent us from crossing important threshold levels of atmospheric carbon. Actually, we’ve probably already crossed this level, and therefore will need powerful carbon sequestration and storage methods too.

If we think creatively about the solution, we may actual be able to accomplish both of these goals—emissions reductions and carbon sequestration—simultaneously.

The most critical thing that we get right is putting a price on carbon that reflects its current and future costs for human society. Presently there is no incentive for an emitter of carbon dioxide, whether it be a family, commercial facility, coal fire power plant, or industrial plant, to conserve energy and lower emissions.

But how exactly do we do this? The two most popular methods being proposed are Cap-and-Trade and a Carbon Tax. Many contrasts have been drawn between the two approaches, but, in many respects, the systems are not altogether dissimilar (and they can in theory used in tandem).

Cap-and-Trade—the approach most popular among politicians—would put a quantitative limit on annual carbon emissions by auctioning permits that power plants and other industries would have to purchase in order to burn fossil fuels, whereas, a Carbon Tax—the approach most popular among economists—would discourage emissions reductions by increasing the cost of doing so.

Both effectively put a price on carbon emissions. Both require monitoring and administrative infrastructure. Both are open to political-corporate manipulation. The most often cited benefits and drawbacks of each system can be surmised as follows:


-A Carbon Tax will provide greater efficiency and transparency than a Cap-and-Trade system. It will be easier to set up and easier manage because it utilizes the existing tax structure.

-A Carbon Tax will offer greater predictability in prices which is beneficial to businesses and industries investing in low-carbon options such as energy conservation and efficiency measures and replacement of fossil fuel derived energy with renewables.

-Like the Cap-and-Trade system, a Carbon Tax can be structured such that 100 percent of the money is returned directly to the people who are taxed.

-A Carbon Tax discourages carbon emissions but cannot limit them to quantifiable annual levels.

-A Carbon Tax is based almost exclusively around the nation-state level. It is not scalable (e.g. it cannot be easily adopted by a local municipality which then influences a state toward adoption) and it appears that it will be difficult to encourage universal adoption even if an influential country such as the United States were to implement it, due to the inherent differences of individual country’s taxation systems.

-Despite claims that the wealthy will invariably pay a greater portion of the Carbon Tax, there is no real safety net to protect low-income and working class people from rising energy prices unless some portion of the money were to be allocated specifically for low-income assistance programs such as the HUD’s Weatherization Programs.

-Many people (especially those in the U.S.) are adverse to anything resembling, associated with, or connected to a tax. The very name and identity of the approach could also be its largest obstacle for implementation.


-Emissions can be directly controlled by placing a restriction on the amount of annual carbon emissions. If all emissions are accounted for, this allows us to use the best scientific research possible in order to establish what annual emissions should be.

-Like a carbon tax, the Cap-and-Trade can be structured to redistribute the collected funds equally to the general public.

-The Cap-and-Trade has been at least partly proven in concept through the successful cap-and-trade system utilized in the Clean Air Act of 1990.

-A Cap-and-Trade system is more subject to political and corporate manipulation, could require a much larger administration to manage it.

-Cap-and-Trade could take significantly longer to design, get legislative approval and to implement.

-A Cap-and-Trade system may lead to price volatility on energy markets which would create difficulties for companies investing in renewable energy and other low-carbon solutions.

Again, it is important to emphasize that the two systems are more similar than the contrasts suggest.

Cap-and-Share ( is proposing a unique model of distributing permits directly to the citizenry that may get rid of much of the complexity and bureaucracy of former Cap-and-Trade based systems. They also claim their model is flexible, scalable, and not prone to corruption. If this is indeed the case, they would have gotten rid of many of the purported drawbacks of a Cap-based system.

Meanwhile, The Carbon Tax Center ( has also put forth some very convincing arguments as to why a carbon tax may be the best approach and how it could be made to work in an extremely economical and equitable manner.

Recently, there has been widespread excitement over the proposal to return the generated funds from either the Cap or the Tax directly back to the people. James Hansen has suggested this in his paper “Carbon Tax and 100 Percent Dividend,” as has Peter Barnes in his newly released book “Climate Solutions.”

Directly depositing money into the bank accounts of each individual citizen on a monthly basis, as Hansen has suggested, would surely be a fairly convincing way to convince voters that the system is transparent, fair, and non-regressive.

The most critical thing is not which system we ultimately choose to go with, but that we make the system as transparent, robust, and equitable as possible. And, of course, that we put it into place as soon as possible—we simply do not have much time left to start initiating these reductions in emissions.

In future postings, I hope to explore some unique methods by which we can accomplish several other important measures simultaneously, including: 1) encourage global adoption of a carbon accounting system, 2) promote population stabilization, 3) establish a global fund to assist in climate mitigation and adaptation (particularly for the poorest people in the world), and 4) research, design, and demonstration of CCS technologies as well as Carbon Negative Energy technologies from pyrolysis.

We have but one beautiful planet to protect and but precious little time to do it in. What we choose to do–or not to do–in the next five to ten years will make all the difference. We must be prepared to work hard and work together–that’s the only way we’re going to win!

What do you think? Leave a comment below.

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