Working Paper: NBER ID: w19338
Authors: Lawrence H. Goulder; Andrew Schein
Abstract: We examine the relative attractions of a carbon tax, a "pure" cap-and-trade system, and a "hybrid" option (a cap-and-trade system with a price ceiling and/or price floor). We show that the various options are equivalent along more dimensions than often are recognized. In addition, we bring out important dimensions along which the approaches have very different impacts. Several of these dimensions have received little attention in prior literature. \n\nA key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid large wealth transfers to oil exporting countries.
Keywords: Carbon Tax; Cap-and-Trade; Emissions Pricing; Climate Policy
JEL Codes: H23; Q50; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exogenous emissions pricing (Q58) | prevents price volatility (G13) |
| Exogenous emissions pricing (Q58) | reduces expected policy errors (D78) |
| Carbon taxes and cap-and-trade systems (Q58) | equalize marginal abatement costs (D61) |
| Design of emissions pricing instrument (D49) | influences regulatory outcomes (K20) |
| Additional greenhouse gas-reducing policies alongside a carbon tax (Q58) | greater overall emissions reductions (H23) |
| Cap-and-trade (Q58) | wealth transfers to oil-exporting countries (F16) |