CARBON TAXES VERSUS CAP AND TRADE: A CRITICAL REVIEW

Lawrence H. Goulder and Andrew R. Schein
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Lawrence H. Goulder: Stanford University, Resources for the Future and NBER, Department of Economics, Landau Economics Building, Stanford University, Stanford CA, 94305, USA
Andrew R. Schein: Department of Economics, Landau Economics Building, Stanford University, Stanford CA, 94305, USA

Climate Change Economics (CCE), 2013, vol. 04, issue 03, 1-28

Abstract: We examine the relative attractions of a carbon tax, a "pure" cap-and-trade system, and a "hybrid" option (a cap-and-trade system with a price ceiling and/or price floor). We show that the various options are equivalent along more dimensions than often are recognized. In addition, we bring out important dimensions along which the approaches have very different impacts, including some dimensions that have received little attention in prior literature. Although no option dominates the others, a key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of important attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid potential wealth transfers to oil-exporting countries.

Keywords: Carbon tax; cap and trade; climate change policy; emissions pricing (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (99)

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DOI: 10.1142/S2010007813500103

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