Cap and Trade is Better at reducing carbon emissions than a carbon tax.  A cap-and-trade system provides companies with credits if they are able to reduce their emissions below an established level. They can then sell these credits for a profit. So, if a company takes action to reduce its carbon emissions below the designated level, than it can make a profit. This is a powerful market incentive that is more likely to cause companies to invest money in finding ways to reduce their carbon emissions. A carbon tax, conversely, only provides the incentive of cutting costs, and does not offer this important profit motive.  With cap-and-trade emissions are much more likely to be meaningfully reduced, specifically because the cap is static and as such nations can choose to raise and lower it as they wish. Within this mechanism, market prices would simply reflect the availability of credits. As such, nations can guarantee a reduction in carbon emissions just by reducing the number of credits in the market.  Finally, because cap and trade affects all companies and minimises cost to them, it provides all companies with an incentive to work toward green technology. Under the status quo, where subsidies and research grants are paid to businesses researching emissions reduction technology, the government has to decide which companies are “best” at solving the ecological damage that industry causes. Other companies feel they don’t have to contribute because they are simply being taxed instead. We do not know where the next development in green technology will come from. As such a smaller impetus for everyone is likely to be better than a large impetus for a small number of companies who might not, in any event, be able to develop workable solutions to emissions problems. [1]  [1] Mankiw, Gregory, “Carbon Tax Problem,” 11/04/07