Cap and Trade System vs. Carbon Tax System Research Paper

Cap and Trade System vs. Carbon Tax System - Research Paper Example The call for robust action on climate change is coherent and urgent. It is obvious to any environmental conservationist that without firm action the effects from heat waves, droughts, flooding, hurricanes and other adverse weather occurrence will always keep worsening, creating even disastrous human and economic effects (Environmental Justice Matters 2). There are basically some approaches to be opted for:   a direct carbon tax and a cap-and-trade approach.  Ã‚   Climate change critiques have so far seen success in stopping adoption of whichever of these appears to have any momentum (Environmental Justice Matters 2). With cap-and-trade, they not only managed to disorganize and finally prevent enactment of the Waxman-Markey bill in the 110th Congress, but were able to tar cap-and-trade as a critically uncalled for strategy in the general political dialogue – notwithstanding its prior consensus success with SO2 and NOX (Environmental Justice Matters 2). Economists hold the v iew that, if the market is left to operate freely, greenhouse gas emissions will be too much, since there is not enough incentive for firms and households to cut emissions. Out of that, they propose the polluter pays principle and fixing a price on carbon dioxide and other greenhouse gases (Hedges 1). This can be made possible through either a carbon tax or a cap-and-trade scheme. A carbon tax imposes a tax per unit of greenhouse gas emissions and gives firms and households, an incentive to cut pollution if doing so would cost less than paying the tax (Lavelle 4). Because of that, the size of pollution reduced is a factor of the chosen level of the tax. The tax to be paid is arrived at by assessing the cost associated with each unit of pollution and the costs of controlling that pollution. Setting the tax level too low will cause the firms and households to probably opt for paying the tax and continuing to pollute, above what is optimal for society. Very high and the costs will esca late higher than necessary to cut emissions, impacting on profits, jobs and end consumers (Lavelle 4). On the other side, a cap-and-trade system sets an optimum level of pollution, a cap, and disburses emissions permits to firms that produce emissions. Companies should have a permit to cover each unit of pollution they produce, and they can get these permits either through an initial allocation or auction, or through trading with other firms. Since some firms suddenly find it cheaper to cut pollution than others, trading occurs (Klare 12). While the maximum pollution quantity is put in place in advance, the trading price of permits vary, becoming more expensive when demand is high relative to supply and cheaper when demand is lower. A price on pollution is therefore come up with as a result of setting a ceiling on the overall quantity of emissions. As time passes, the limits become stricter, cutting pollution simultaneously until the desired reduction goal is reached. This is typica l example of the cap and trade program enacted by the Clean Air Act of 1990, which cut the sulfur emissions that cause acid rain and it met the target at a much lower cost than industry or government anticipated (Klare 12). It will therefore turn out to be cheaper for some firms to reduce their emissions below their permitted limit than others. These more dynamic companies, who emit below their allowance, can trade their extra with companies that are not able to make reductions as easily. This leads