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Cap And Trade Vs. Taxation: What To Do About CO2 Emissions

Ian Britton
/
Flickr Creative Commons

A recent UN report concludes that we still have just enough time to prevent the worst effects of climate change.  University of Dayton professor Bob Brecha explains one of the key steps needed to put us on the right path.

When I was a kid, the media were full of stories about polluted cities and even burning rivers.  Environmental damage was visible, and with a combination of grassroots pressure and governmental leadership, we took action.  Now we are faced with the potential damages from climate change, but these are not visible in the same way.  Making a commitment to avoid serious climate change means reducing carbon emissions dramatically over the next few decades.  So what’s the best way to accomplish that goal?

One obvious solution is to simply have someone with enough power tell us what we can and cannot do.  Most of us feel uncomfortable with that path, so what are other options?  

Some economists agree that a critical step is to set a cost for carbon emissions. After all, if there is a public harm being done by the practice of dumping excess CO2 into the atmosphere and oceans, those costs should be included in the price of fossil-fuel services, just as we set costs on pollution in the 1970s.

There are two main ideas about how to accomplish CO2 pricing.  A tax could be set on all CO2 emissions at a certain number of dollars per ton.  Or, a limit could be set on total emissions, and then permits for those emissions could be traded in a market.  Since the goal is reducing emissions, presumably the tax would increase over time, or the cap would decrease.

According to some economists, the two plans should be equivalent, if carried out properly.  The trick is to set the level of a tax to achieve CO2 reduction goals.  On the other hand (and as a scientist I tend to favor this route) a cap and trade system starts with the scientific question of how much CO2 can be released before causing an intolerable risk of damages.  The markets would then help decide how to allocate the atmospheric capacity to best achieve that goal.  

It’s important to note that revenues from carbon taxes or permits do not have to be additional income to governments – they can replace other taxes, for example.  The point is not to raise extra money, but to balance out real costs to society, either now or in the future.   

Effectively, we could start to tax “bads,” that is, things that harm us, instead of “goods,” the things we want to encourage. Maybe we could even refund the income to households as a kind of dividend.

Our children and grandchildren will pay for carbon emissions one way or another.  We can either be pro-active, or we can wait and react by cleaning up problems after they become serious.  Which version do you think is cheaper in the long-run?  Under either a carbon tax or a cap-and-trade system there are very important questions that come up concerning how resources and revenues are distributed.   That is where citizens in democratic societies must help make decisions about our sustainable future.  Our parents set us on the path to cleaner air and water – let’s do our kids the same favor.

Bob Brecha is a professor of physics and renewable and clean energy. He is the coordinator of the Sustainability, Energy and The Environment program at the University of Dayton.
 

Bob Brecha is a professor of Physics and Renewable and Clean Energy at the University of Dayton, and Research Director at UD's Hanley Sustainability Institute. Follow him on Twitter: @BobBrecha
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