Both systems seek to reduce greenhouse gas emissions by imposing a charge on companies for each ton of pollution they emit.
However, the method each one employs to calculate the rate charged is different.
In the cap-and-trade system, a central authority is able to set a limit, or cap on emissions by allocating permits, or carbon credits.
These credits permit companies to emit a certain volume of pollution.
The market sets the price at allowance auctions, where firms trade permits based on their pollution requirements.
Whereas, a carbon tax sets a uniform price for all emissions, and the market determines how much it is willing to emit based on the rate set.
Each approach has numerous pros and cons for taxpayers, and consumers.
“At the most recent allowance auction under the current cap and trade programme in California, emissions allowances were settled at $11.48 per allowance,” said Jeff Saviano, America’s leader of indirect, state and local taxes at EY. “With the carbon tax proposed at $15.00 per allowance in 2015, the cost of carbon emissions to businesses would increase and this may be passed on to the consumer.”
However, he was keen to point out that due to the variable pricing structure under the cap-and-trade regime, fuel prices for the consumer may fluctuate more than they would under a flat rate carbon tax.
“Furthermore, a carbon tax may offer a greater certainty regarding the price for the allowances, thereby allowing businesses to better factor it into their analyses when considering investments in emission reduction technology,” he added.
The cap-and-trade system is a central part of the Global Warming Solutions Act, introduced by Republican Governor Arnold Schwarzenegger, in 2006.
It aims to reduce emission levels in the state of California to 1990 levels by the end of 2020.
The carbon tax if adopted will offer price certainty to businesses, and the cost to the end consumer will be easier to calculate.
The main drawback of in implementing a carbon tax is the central authority loses its power to cap emissions.
Thus, allowing companies to emit at levels, which their budgets can afford.
