There is no simple yes or no answer, and the policies are not necessarily mutually exclusive. Several important advantages and drawbacks of the respective policies are outlined below. The Case for Emissions Trading A well functioning emissions trading system allows emissions reductions to take place wherever abatement costs are lowest, regardless of international borders. If emissions reductions are cheaper to make in Poland than in France, emissions should be reduced first in the former where costs are lower. This also makes emissions trading more conducive to international environmental agreements, such as the Kyoto Protocol, because specific emissions reduction levels can be agreed upon more easily than tax rates or policy instruments, which may vary in appropriateness and applicability between states.
Emissions trading is more appealing to private industry.
By decreasing emissions, firms can actually profit by selling their excess greenhouse gas allowances. Creating such a market for pollution could potentially drive emissions reductions below targets. In general, transferring resources between private entities is more appealing than transfers to government. Thus firms emitting more than one GHG have more flexibility in making reductions. Permits adjust automatically for inflation and external price shocks, while taxes do not.