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Cap & Trade Vs. Carbon Tax

by Aaron Ziv
  • Overview

    Both carbon taxes and cap & trade aim to encourage smaller cars made of fewer, lighter materials.
    'Cap & trade' and carbon taxation are government-imposed mechanisms that aim to restrict the emission of carbon dioxide. While the mechanisms are somewhat different, both aim to discourage carbon emissions by increasing the prices of products and services (such as electricity or transportation) that cause them.
  • Cap and Trade

    A cap and trade system sets a pre-determined limit upon carbon dioxide emissions, and divides that quota into shares to be purchased, sold and traded by companies and citizens. Cap and trade penalizes persons or companies who cause the emission of more carbon dioxide than allowed by the government's allotment to them.
  • Carbon Taxation

    A carbon tax discourages the emission of carbon dioxide by placing a tax on all activities that produce it. In this scenario, every carbon dioxide emitter (such as a factory, office, farm or driver) must pay money to the government whenever they commit a carbon emitting activity.
  • Similarities

    Both mechanisms increase the cost of activities that emit carbon dioxide. Both systems rely on political officials to establish costs for carbon-emitting activity.
  • Differences

    In a cap and trade system, the greatest advantages will be enjoyed by those corporations and businesses which are well-positioned to trade. Under carbon taxation, the government will take income from the new tax.
  • Areas of Controversy

    The sustainability and practicality of carbon trading or taxing is not yet certain, and analysts are watching the results of new European and Australian emissions trading schemes (ETS) to see if the mechanisms have a future. Eco-activists support raising the cost of carbon dioxide emissions. Business and anti-poverty groups worry that taxes and ETS mechanisms discourage the growth of employment and the economy.

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