The standard economic argument in favour of a uniform carbon price is efficiency – all agents face the same marginal cost of pollution. Such a price can be achieved either by an emissions trading (cap-and-trade) system or by imposing a tax. This column argues that whether a uniform policy or a mixture of both is optimal depends on a few factors, and most importantly on the nature of stochastic shocks affecting the economy.
Bernard Caillaud, Gabrielle Demange, 06 October 2015
Jeffrey Frankel, 27 February 2014
Market-based mechanisms such as cap-and-trade can tackle externality problems more efficiently than command-and-control regulations. However, politicians in the US and Europe have retreated from cap-and-trade in recent years. This column draws a parallel between Republicans’ abandonment of market-based environmental regulation and their recent disavowal of mandatory health insurance. The author argues that in practice, the alternative to market-based regulation is not an absence of regulation, but rather the return of inefficient mandates and subsidies.
Richard Schmalensee, Robert Stavins, 07 March 2013
Not so long ago, cap-and-trade mechanisms for environmental protection were popular in Congress. Now, such mechanisms are denigrated. What happened? This column tells the sordid tale of how conservatives in Congress who once supported cap and trade now lambast climate change legislation as ‘cap-and-tax’. Ironically, conservatives are choosing to demonise their own market-based creation. The successful conservative campaign that disparaged cap-and-trade means it may now be politically impossible to promote it in the US. The good news? Elsewhere, cap and trade is now a proven, viable option for tackling large-scale environmental problems.
Ralf Martin, Mirabelle Muûls, Ulrich Wagner, 24 May 2010
This week, the European Commission will release more details of its plans to tighten the greenhouse gas emissions targets in the EU’s Emissions Trading System. A key concern will be the potentially negative impact on the competitiveness of affected businesses. This column argues that industry is successfully exploiting such concerns to obtain free emission permits according to criteria that are too lax. Most of the exempt sectors would not close or relocate if they had to pay for permits, and removing these exemptions would raise €7 billion annually.
Bob O'Brien, 25 April 2010
With cap-and-trade schemes gaining momentum as a viable environmental policy, this column outlines such a market for water licences in Australia. Since the early 90s the market has grown to accommodate trade of nearly 3 billion Australian dollars worth of licenses with a total value of water access entitlements at nearly $A40 billion.
Robert Stavins, Robert Hahn, 13 April 2010
Are cap-and-trade schemes working? This column presents a summary of eight existing schemes arguing that half meet the independence property whereby the initial allocation of property rights does not affect the environmental or social outcome and the scheme is cost-effective. This success is a contrast with other policy proposals where political bargaining reduces the effectiveness and drives up cost.