Carbon Taxes vs. Cap and Trade: A Critical Review

40 Pages Posted: 17 Aug 2013

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Andrew Schein

Stanford University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

We examine the relative attractions of a carbon tax, a “pure” cap-and-trade system, and a “hybrid” option (a cap-and-trade system with a price ceiling and/or price floor). We show that the various options are equivalent along more dimensions than often are recognized. In addition, we bring out important dimensions along which the approaches have very different impacts. Several of these dimensions have received little attention in prior literature. A key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid large wealth transfers to oil exporting countries.

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Suggested Citation

Goulder, Lawrence H. and Schein, Andrew, Carbon Taxes vs. Cap and Trade: A Critical Review (August 2013). NBER Working Paper No. w19338, Available at SSRN: https://ssrn.com/abstract=2311587

Lawrence H. Goulder (Contact Author)

Stanford University - Department of Economics ( email )

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Andrew Schein

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