Question

What are the key differences between an emissions tax and cap-and-trade system? Which strategy would each of the following groups tend to favor in general and why?

1. environmentalists.
2. businesses (who must comply).
3. agency regulators (who must enforce).

Answer 1

An emission tax means taxing the emissions by all the commercial and industrial activities. If the emissions are low the tax rate will be low and if the emissions are high, tax will be high.

Cap and trade system is a measure adopted in order to reduce the green house gas emissions. A cap will be imposed for the emissions of the green house gases. When the emissions of green house gases is beyond the cap or limit then it will be charged. Now if the emissions are lower than that limit the excess can be traded.

a. The environmentalists favour emission tax as it is a charge on all the emissions by a particular company. It is a more effective measure than cap and trade system to reduce the level of pollution.

b. The business men prefer cap and trade as they can trade the excess limits that is left in case of less emissions.

c. The agency regulators will be indifferent between the two types as they are only enforcing the taxes. This is because both of these approaches provide an incentive for incurring less pollution levels. Emission tax induces the people to emit less levels of pollution and cap and trade gives the people to make profit out of the less levels of pollution