Journal Article - Review of Environmental Economics and Policy
The Relative Merits of Carbon Pricing Instruments: Taxes versus Trading
Abstract
There is widespread agreement among most economists that economy-wide carbon pricing will be a necessary (although not necessarily sufficient) component of any policy that can achieve meaningful and cost-effective CO2 reductions in large, complex economies. But there is less agreement about which of two carbon pricing instruments will be better. Some support carbon taxes, while others favor cap-and-trade. How do these two pricing approaches compare? In this survey and synthesis of theory and experience, I show that when carbon taxes and carbon cap-and-trade systems are designed in ways that make them truly comparable, their characteristics and outcomes are similar and, in some respects, fully equivalent. But the two approaches can perform quite differently along some specific dimensions, sometimes favoring taxes and sometimes cap-and-trade. The key differences in performance depend on details of program design. Indeed, what appears at first glance to be a dichotomous choice between two distinct instruments can turn out to be a choice of specific design elements along a policy continuum.
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The full text of this publication is available via Review of Environmental Economics and Policy.
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Harvard Project on Climate Agreements
For Academic Citation:
Stavins, Robert N. "The Relative Merits of Carbon Pricing Instruments: Taxes versus Trading." Review of Environmental Economics and Policy, vol. 16. no. 1. (Winter 2022): 62–82.
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Abstract
There is widespread agreement among most economists that economy-wide carbon pricing will be a necessary (although not necessarily sufficient) component of any policy that can achieve meaningful and cost-effective CO2 reductions in large, complex economies. But there is less agreement about which of two carbon pricing instruments will be better. Some support carbon taxes, while others favor cap-and-trade. How do these two pricing approaches compare? In this survey and synthesis of theory and experience, I show that when carbon taxes and carbon cap-and-trade systems are designed in ways that make them truly comparable, their characteristics and outcomes are similar and, in some respects, fully equivalent. But the two approaches can perform quite differently along some specific dimensions, sometimes favoring taxes and sometimes cap-and-trade. The key differences in performance depend on details of program design. Indeed, what appears at first glance to be a dichotomous choice between two distinct instruments can turn out to be a choice of specific design elements along a policy continuum.
Want to Read More?
The full text of this publication is available via Review of Environmental Economics and Policy.Stavins, Robert N. "The Relative Merits of Carbon Pricing Instruments: Taxes versus Trading." Review of Environmental Economics and Policy, vol. 16. no. 1. (Winter 2022): 62–82.
- Recommended
- In the Spotlight
- Most Viewed
Recommended
News - Harvard Project on Climate Agreements
Harvard Project Conducts Research Workshop on China's National Emissions Trading System
Audio - Harvard Environmental Economics Program
Understanding Climate Change Adaptation: A Conversation with Robert Pindyck
News - Harvard Project on Climate Agreements
Assessing China’s National Carbon Market: An HPCA Conversation with Valerie Karplus, Carnegie Mellon University
In the Spotlight
Most Viewed
Analysis & Opinions
Modernizing Biosecurity and Biosafety in the U.S.: Key Lessons Learned
Newspaper Article - The Times of London
Professor Unmasks Russian Spy Who Stole the Secrets of Concorde
Paper - Belfer Center for Science and International Affairs, Harvard Kennedy School
Attacking Artificial Intelligence: AI’s Security Vulnerability and What Policymakers Can Do About It