Carbon Tax System - Research Paper Example

Any environmentalist are never new to these two terms cap and trade system and carbon tax system. The environmentalist often uses the two interchangeably and often bonder their heads on which system work best in the conservation of the environments. I will examine the relative attractions of a carbon tax, and a “pure” cap-and-trade system. This desertion will show the various options are equivalent along more dimensions than often are recognized. In addition, it will bring out important dimensions under which the approaches have very different impacts. 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.   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 view 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 escalate 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 typical 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 to a system that guarantees a set level of overall reductions, whilst rewarding the most dynamic companies and making sure that the cap can be met at the lowest possible cost to the economy (Klare 12). If the federal government auctions the permits to the firms required to cut their emissions, it would create a bigger and dependable revenue flow. These financial resources could be a much needed system to achieving a critical public policy objective that relates to climate change efforts to reduce and economic development. The federal government can also opt to “grandfather” allowances to the polluting firms by handing them out free based on projected emissions. This would give the maximum benefits to those companies with higher baseline emissions that have historically done little to cut their pollution. The difference in the two is the way the two policies distribute the cost of reducing pollution. Cap-and-trade has often been the case that permits are given out for free. This means there is cheaper cost implication for industry in the early stages of the scheme, because they are required to pay for only any extra permits bought from other firms – not for the first tranche of permits given to them to cover most of their emissions under 'business as usual'. This approach is mostly preferred by majority of industries and explains why it has been used, since it helps get firms to accept controls on emissions in the first place (Chu 3). By contrast, with a tax there is an instant cost for businesses to pay per unit of greenhouse gas produced, therefore there is a huge initial impact to the balance sheet. But while grandfathering is good for near-term business profitability, it is not imply that it is the best outcome for society. In fact, it denies the government of valuable revenues, which it could raise in auctioning the permits in the first place, and which could be used to reduce other taxes (Chu 3). The two systems also differ in how they perform under uncertainty on the costs and benefits of reducing emissions. In tax mechanism, the price of emitting a unit of pollution is given, but the total quantity of emissions is not set. A tax system hence make sure everybody knows the price being paid for each unit of carbon dioxide emitted, but not sure about the actual quantity of emissions (Chu 3). On contrary, cap-and-trade is certain on the quantity of emission because it cannot exceed the cap, but one cannot predict the cost of achieving these reductions. Which is opted for by many is one depending on how sensitive the level of environmental damage is to changes in emissions, compared with how sensitive the cost of reducing pollution is to the same changes. If the degree of environmental impact is very sensitive, then it is better to be certain on what the quantity of emissions are which points to cap-and-trade. On the other side if the cost of cutting pollution is very sensitive to changes in emissions, it is better to be certain about the cost of cutting emissions, pointing to a tax system (Chu 3). The impact of the two mechanisms, on the environmental changes is debatable. To some extents, most economists agree that unpredictability alone favors for a tax. Climate change is a factor of the quantity of greenhouse gases in the atmosphere, and in each year the increase in the quantity as a result of new emissions is small, so the environment is may be not that sensitive to the uncertainty about the level of emissions brought about by going for a tax, at least over a year or two. Conversely, the price of cutting pollution is very sensitive to changes in emissions, as it can be expensive to businesses to change their production methods immediately. In the long term, however, it is unclear whether a tax is better, because big changes in the stock of greenhouse gases in the atmosphere may cause great environmental damage. Some economists have brought forth another model that may offer the best of both worlds. This tends to comprise of a cap on emissions, but with adjustment mechanisms such as a carbon price floor or ceiling, to keep the price of a permit within acceptable limits. This model however has its shortcomings, such as greater complexity and more intervention by the regulator in the permit market. Whichever of these mechanisms is opted for to place a price on carbon, they are prototypes of just one of a number of policies wanted to reduce greenhouse gas emissions (Bradley and Roberts 27). With all this analysis a cap and trade system seems to be the best means to come up with a quantifiable, enforceable by law limit on emissions which will make sure that important climate change goals are met at a cheaper cost. This program, if combined with offsets, will accelerate global emissions reductions (Bradley and Roberts 27). More so, cap and trade provides the private sector with the flexibility needed to cut emissions while stimulating technological innovation and economic growth. Cap-and-trade is currently the policy instrument of choice in many countries like, the EU, New Zealand and Australia, and has been successful in the US Acid Rain Program (Bradley and Roberts 27). By putting together trading with a price for emitting CO2, cap-and-trade came up with the most effective reduction projects within the market, providing a cheaper alternative. This mechanism has been put in to practice on the problem of sulfur emissions from power stations in the US, where the general cost of meeting environmental goals has been much lower than expected (Arnold 32). Achievement of the required SO2 emission reductions in the Acid Rain are now expected to cost $1 to $2 billion per year, imagine one quarter of original EPA estimates. Dependent on the different situations of any particular economy, the price for emissions self-stabilizes when using a market-based approach. This can be seen with respect to the recent price fluctuation in the European Union carbon markets, where economic down turn signs were witnessed, quite primarily, by a softened price for emissions (Arnold 32). Both the two mechanism cap and trade and carbon tax have similarities and differences but both have the same goal at hand, to reduce the environmental dangers posed by increased emission of carbon in to the atmosphere. However, they are different in their approaches due to the uncertainties that pertains each of the two (Felix 4). The cost implications are also dictating the one to be chosen by a company. The carbon trade has no much implication at its initial stage but the tax immediately hit the balance sheet of the company (Felix 4). These debate on which is best will keep raging on but the key thing that ought to be understood is that the effects of pollution on the society will persist. Works cited Parks, Bradley, and J Roberts. "Climate Change, Social Theory and Justice." Theory, Culture and Society. 27 (2010): 2-3. Print. Arnold, Denis G. The Ethics of Global Climate Change. Cambridge: Cambridge University Press, 2011. Print. Salmon, Felix. When the Carbon Tax and Cap-and-Trade Kiss and Make Up. Accessed on 12/5/13 from http://www.felixsalmon.com/2007/05/when-the-carbon-tax-and-cap-and-trade-kiss-and-make-up/ Henry Chu. Carbon tax' is sensible, and perhaps inevitable, advocate says. Los Angeles Times. 2009. Environmental Justice Matters. To Address Climate Change. 2007. Accessed on 12/5/2013 From http://www.ejmatters.org/ Marianne Lavelle. Carbon as a Commodity. The center for public integrity. 2009. Michael T. Klare. World Energy Report 2012. Nation of change. 2012. Accessed on 12/5/13 from http://www.nationofchange.org/world-energy-report-2012-1354118005 Chris Hedges. Stand Still for the Apocalypse. Truthdig. 2012. Read More