Cap-and-Trade or Carbon Tax?

Cap-and-Trade or Carbon Tax?

If you saw the SOTU address earlier this month, you heard President Obama renew his plea for a 'market based' solution to our climate change crisis. That comment triggered a heated policy discussion among my environmentalist friends. What does a tax guy say when folks ask about the cap-and-trade (C&T) systems in place around the world? If you're like me, the tendency is to applaud the ambition but criticize the execution as a failure of sorts...

...  I am highly skeptical of cap-and-trade. A straightforward carbon tax is the better option because it will be less prone to manipulation. I don't think C&T systems will function in the real world. Industry will lobby regulators to reset where the emissions cap is set. This is to be expected. They will cite various commercial and competitiveness concerns, often involving China's and India's questionable environmental policies. I understand why industry raises those issues; it's rational self-interest. I would do the same thing if I were in their shoes.

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C&T is not a tax concept; carbon taxes are. While new taxes are not a panacea to solve all of society's problems, skillfully crafted taxes can be an effective means of addressing externalities. Bottom line: One of my wishes for 2013 is that all my 'Green' friends will throw in the towel on C&T and begin to focus their attention on a carbon tax, which would better serve their interests.

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View Robert Goulder's opinion in its entirety on the taxanalysts® Blog.

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