Two methods used to put a price on carbon to address the carbon emissions crisis are: cap-and-trade and carbon tax. These two mechanisms are two popular policy tools that aim to put a price on carbon emissions, but they work in diverse ways.
Cap-and-trade attempts to put a limit on the total amount of greenhouse gas emissions that are allowed within a specified period. Companies are then allocated permits or allowances that equate to a sanctioned amount of greenhouse gases that are allowed to be emitted. If a company were to emit less than their allowance, they would be able to sell their excess permits to other companies to help offset their potential excess emissions. As a result, this creates a market for emissions trading, where organizations can trade permits based on their emission requirements. Regulatory bodies will reduce the emissions cap over time to drive carbon emissions to desired levels.
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This tax directly imposes a fee on a company based on the amount of CO2 emissions that company produces for a given period. The price of the carbon tax is set based on the social cost of carbon, which represents the economic cost of the damage caused by each ton of greenhouse gases emitted (University, 2021). A carbon tax can be implemented as a flat tax or can be adjusted based on the carbon content of different emission types (Dushime, 2021).
Cap-and-trade policy has both advantages and disadvantages. Cap-and-trade’s primary advantage is that it sets a specific limit on emissions, which may help to ensure emissions are reduced to appropriate levels. Another advantage is that this market-based approach allows companies to find the most cost-effective way to reduce their emissions (Environmental Defense Fund, 2017). One disadvantage of cap-and-trade is that it is an overly complex system that may struggle to set the correct cap limit and be subjected to high administrative