There is a growing debate between two competing climate change policy instruments - carbon taxes and emissions trading. This analysis attempts to clarify the two policy approaches and the respective advantages of each.
Taxes increase the prices of certain goods and services, thereby decreasing the quantity demanded.
To be in compliance, actors participating in the system must hold a number of permits greater or equal to their actual emissions level. This enables emissions reductions to take place where least costly. 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.