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article imageCarbon tax or cap-and-trade — Which system works best?

By Karen Graham     Nov 15, 2018 in Environment
Fighting global warming will require taxing carbon emissions, or setting a price on carbon pollution if the world is to avoid the consequences of climate change. How nations go about achieving zero emissions in a cost-effective way is the key.
Experts have warned that climate change is a catastrophe in slow-motion - and if we do nothing to mitigate the effects, then we will see disastrous consequences. The latest U.N. Intergovernmental Panel on Climate Change (IPCC) report argues that carbon pollution must be cut to zero by 2050 to avoid disaster.
To achieve the IPCC goals will require that we transform the energy, transportation, housing, and food industries and more, and we can't wait until tomorrow to tackle this transformation, either. There seems to be an ideological divide among many states and provinces that have carried over to the courts and legislatures.
Despite some governments, states or provinces turning their back on the science behind climate change, there are cost-effective tools available, and nations, states, and provinces are using them to make progress in reducing greenhouse gas (GHG) emissions.
Trudeau s announcement puts a price on pollution with a plan that reinvests back into Canadians.  We...
Trudeau's announcement puts a price on pollution with a plan that reinvests back into Canadians. "We’re taking action to fight climate change and protect the environment, even while Conservatives refuse to do so," said Trudeau.
Justin Trudeau, Prime Minister of Canada
A lot of misinformation has been spread around in both the U.S. and Canada, and it's time that citizens understand that sometimes, the truth is not as harsh as many people would lead us to believe. So, let's look at two systems of carbon pricing already being used worldwide.
According to the Institute for Climate Economics, 46 countries and 26 subnational governments have established a carbon pricing policy as of April 1, either using a carbon tax or a carbon market (cap and trade) in which quotas are set for big polluters who then have the option to buy or sell credits from other companies.
Carbon taxes in Canada and the U.S.
The Trudeau government’s rationale for a national carbon-pricing plan is to encourage Canadians and big business to use less fossil fuels. Starting in 2019, Canadians will start to pay more for the gas they burn and the products they buy, but the cost will depend on where you live.
Bhutan's first pair of wind turbines in the village of Rubesa symbolise the Himalayan kingdom&a...
Bhutan's first pair of wind turbines in the village of Rubesa symbolise the Himalayan kingdom's achievement as the world's only carbon negative country
ARUN SANKAR, AFP
This is because some provinces, like Alberta and British Columbia, have their own carbon-pricing system, along with incentives to convert to renewable energy sources. Those provinces that have no plan would come under Ottawa's carbon pricing plan.
Just this week, Alberta increased solar rebates to 35 percent after announcing solar installations had grown 500 percent across the province since 2015. In B.C., under NDP premier John Horgan, elected in 2017, the province now plans to use its carbon tax revenues to provide rebates like Alberta.
In the United States, in 2018, carbon tax bills have been introduced in seven state legislatures (Maryland, Washington, New York, Hawaii, Rhode Island, Vermont, Maine). Meanwhile, proposals to study a carbon tax have been introduced in the New Mexico, New Hampshire, Vermont, and New York statehouses.
The U.S. has managed to deploy low-carbon technology with sub-optimal market incentives, such as Renewable Portfolio Standards, federal R&D support, and tax credits. However, the U.S. has no carbon tax plan and despite the so-called "blue wave" in the midterm elections, carbon pricing at the federal level is as good as dead right now.
A new analysis estimates that the world's remaining carbon 'budget' to be nearly four...
A new analysis estimates that the world's remaining carbon 'budget' to be nearly four times bigger than previously thought
Johannes EISELE, AFP/File
What is a carbon tax?
Basically, a carbon tax is a fee imposed on each ton of emissions from fossil fuels. This includes oil products such as gasoline and diesel, natural gas and coal-fired electricity. There are many ways to enact a carbon tax. The Canadian federal tax will price carbon at $20 a ton, or 4.4 cents per liter of gasoline, and rise to $50 in 2020.
Three years ago, 56 percent of Canadians supported a national carbon tax plan, but when polled this July, only 45 percent of them were in favor. Now, a more recent poll on November 6 shows support for the Trudeau carbon tax plan back up to 54 percent.
One carbon tax plan is a simple tax on carbon emissions that fund other projects, like environmental projects, or in Alberta's system, ends up being rebates for solar buyers.
Under a European Union trading system  limits are placed on the amount of carbon dioxide companies m...
Under a European Union trading system, limits are placed on the amount of carbon dioxide companies may emit, and those who want to pollute more must buy permits on different exchanges around Europe
PHILIPPE HUGUEN, AFP/File
Another is a revenue-neutral tax, whereby the cost is offset by reductions in some other tax. British Columbia started pricing carbon using this method. After John Horgan became premier, it was changed to a tax that funds other projects.
The third and perhaps most promising option is the carbon fee and dividend, whereby the government places a tax on carbon emissions and then returns most, if not all, of the revenue to citizens as a dividend to offset the tax.
Canadians also have to remember that under the Trudeau carbon tax plan, every taxpayer will get a rebate on their income taxes under the “climate-action incentive."
What is cap and trade pricing?
U.S. carbon emissions trading until now has been limited to the Northeast, some mid-Atlantic states and California. But many countries, including Canada, Mexico, China, and the entire European Union, are levying carbon taxes, running emissions trading systems or using a mix of the two.
Aerial view of Kemper Power Plant  a carbon capture plant  in 2013.
Aerial view of Kemper Power Plant, a carbon capture plant, in 2013.
US Department of Energy
Cap and trade is simply a method where a government caps the total amount of carbon emissions allowed. The government then issues permits to companies specifying how much carbon they can burn. These allowances are sold quarterly at public auctions so consumers know what regulated companies are paying.
Here's the neat thing about the auctions - If a company needs to burn more carbon than they are allowed, they can buy permits from a company that has extra ones because they burned less carbon. Companies will either burn less in order to make money by selling their extra permits or cut emissions to avoid having to buy more.
According to the Globe and Mail, "Quebec allows companies to buy credits from the state of California because it is less expensive to reduce emissions there. As a result, the cost is lower than it would be if companies were limited to purchasing credits within the Quebec market."
The pros and cons of the two pricing methods
Cap and trade is different from a straight carbon tax. A carbon tax doesn't discriminate between individuals and industries. However, a carbon tax is easy to administer and straightforward to understand. Everyone pays the same price to burn carbon.
The Peterhead Carbon Capture and Storage (CCS) project in  Aberdeenshire   UK.
The Peterhead Carbon Capture and Storage (CCS) project in Aberdeenshire, UK.
Penn Energy
However, a carbon tax does not set a cap and trade on an industry, instead just setting a price and hoping everyone will try to reduce their carbon footprint.
With cap and trade pricing, the government can mandate the exact greenhouse-gas reductions it wants to see and tailor the auction of carbon permits to reach those reduction goals. However, cap and trade can be more difficult to administer for a couple of reasons.
A company can overestimate its carbon emissions, causing the government to set emission caps too high. - not actually achieving a real reduction in emissions. There are ways to make sure this does not happen, requiring a look at past emissions reports and company forecasts. If they are unrealistic, emissions can be erroneous.
Cap and trade also is open to favoritism. This is because the government picks the winners and losers in this game - and sometimes it can depend on how much an industry is paying lobbyists to plead their case. A really good lobbyist could convine the government to give them more permits - leaving smaller companies out in the cold.
More about Greenhouse gas emissions, carbon pricing, tax on carbons, cap and trade, Canada