Carbon Taxes vs. Cap and Trade: Theory and Practice

Note on COP-25

This paper will serve as the basis for a panel event conducted by the Harvard Project on Climate Agreements at COP-25 in Madrid, Spain. Time and location are below, and more information here:

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience

Hosted by the Harvard Project on Climate Agreements and the Enel Foundation
Monday, December 9, 2019; 11:30 – 13:00
Location: Room 3

Abstract

There is widespread agreement among economists — and a diverse set of other policy analysts — that, at least in the long run, an economy-wide carbon-pricing system will be an essential element of any national policy that can achieve meaningful reductions of CO2 emissions cost-effectively in the United States and many other countries. There is less agreement, however, among economists and others in the policy community regarding the choice of specific carbon-pricing policy instrument, with some supporting carbon taxes and others favoring cap-and-trade mechanisms. How do the two major approaches to carbon pricing compare on relevant dimensions, including efficiency, cost-effectiveness, and distributional equity? This paper addresses this question by drawing on theories of policy instrument choice pertaining to the attributes — or merits — of the instruments. The paper also draws on relevant empirical evidence. It concludes with a look at the path ahead. Finally, the paper includes an appendix reviewing carbon pricing policy in South America.