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Low Carbon Economics

Instrument Choice

Relative advantages and disadvantages of an emission tax and permits

Student number: 4311528
Word Count: 1498

Contents

INTRODUCTION 2
EMISSION TAX 3
CAP AND TRADE 4
CONCLUSION 5
SUMMARY 5
REFERENCES 6
Attachments 7

INTRODUCTION

I absolutely agree with Lord Stern labelling the climate change as the greatest market failure the world has seen (Stern: 2008). But I also passionately believe that if the market did create the problem it can also solve it. As put by Nic Frances (2008), the famous social entrepreneur, we can solve many social failures including global warming by using the market.
There are two market instruments in inducing reductions in anthropogenic Greenhouse Gas (GHG) emissions which are blamed for climate change. Those are tax and tradable permits (cap-and-trade). The principal difference between them is a choice of price of pollution and quantity of pollution.
Both instruments are considered to be equally effective by economists if three major conditions of “perfect information”, “competitive markets” and “no spatial heterogeneity” are met. But in reality the life is full of uncertainties and the long lasting argument over their relative advantages and disadvantages has been recently sparked up again by the change of winds in the U.S. administration determined to reduce GHG emissions. Due to scale and urgency of this issue it is vital to carefully analyze pros and cons of both and choose the most efficient one.
In this essay I will outline the main points used by supporters and critics of both instruments in this heated “price” versus “quantity” dispute. We will first consider advantages and disadvantages of using tax instrument and then do the same for cap-and-trade. We will then follow up by conclusion in which I will compare both tools supporting my choice with strong arguments.


EMISSION TAX

ADVANTAGES
1.Tax is easier, cheaper and faster to implement
We can not afford to waste time...