Emissions Trading versus a Carbon Tax

It is now widely accepted that human induced greenhouse gas emissions are resulting in climate change. Uncertainty surrounding the timing, severity, and costs of climate change has led to debate over the most appropriate policy response. There is a consensus that market based solutions such as Emission Trading Schemes (ETS) or carbon taxes are more efficient policy responses when compared to command and control standard based regulation. However, whether to apply an ETS or a carbon tax as the primary policy response to reduce greenhouse emissions is a question that divides expert opinion. This paper assesses the efficiency and political economy implications of these two measures. The merits of the two policies are assessed with regard to: • treatment of uncertainty; • impact on short and long term carbon prices; • dynamic efficiency; • revenue raising capacity; • implementation and administration costs; • political acceptability; and • international consistency.