Will Carbon Trading Work?

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Under cap-and-trade, the government establishes the cap using sound science. Cap-and-trade does not require the government to make arbitrary decisions to set prices, ration allowances, or determine which technologies are winners and losers.

Cap-and-trade does not require the government to decide how many emissions each person, company, or industry can emit; nor does it require the government to fix carbon prices, such as in a carbon tax; nor does it require the government to determine to what extent we should rely on different technologies, through command-and-control approaches. The government simply sets the total cap, based on the best available science, and then sells or allocates the number of allowances equal to the cap. If the Government set a cap but did not allow trading, it would be up to the government to determine exactly how much each covered business could emit -- a virtually impossible task.

With a carbon tax, the government sets the cost of the solution, but leaves it up to the marketplace to determine to what extent emissions will be reduced. For example, the government might decide to impose a $50 per ton carbon tax, but it will ultimately be up to consumers and businesses to decide to what extent they are willing to pay that price and to what extent they will instead reduce emissions. And even if a company or business were to aggressively reduce their emissions -- say by 20% by 2020 -- they would still have to pay the tax on the remaining 80% of their emissions.

A traditional command-and-control approach assumes that the government is best able to determine the technologies that will help reduce emissions, as well as the amount of emissions that each technology will reduce. But how can the government know the best way of reducing emissions -- especially since many of the most important emission reductions are likely to come from technologies that have not even been invented yet, or new ways of doing things that no one has yet thought of?