Taxes and caps on carbon work differently but calibrating them poses the same challenge | 10/19/2018 | Staff
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Virtually everything most people on earth do these days involves, either directly or indirectly, the combustion of oil, gas and coal. Burning these fossil fuels is generating carbon emissions, which accumulate in the atmosphere, contributing to global warming.

Since climate change could become catastrophic, economists argue that fossil fuel producers and companies that emit massive amounts of carbon should have to pay a fee or a tax. Economists also say that the people harmed by these emissions – basically, everyone – should be compensated for this harm.

Research - Regulation - Design - Agreements - Ways

My research on environmental regulation and the design of international environmental agreements looks at the two main ways to address this underlying problem: carbon taxes and cap-and-trade systems. As William Nordhaus, one of the two 2018 Nobel laureates in economics, has explained, the main idea behind both of these approaches to putting a price on carbon is to give people and companies an incentive to alter their behavior in ways that reduce greenhouse gas emissions and slow the pace of climate change.

A carbon tax makes fossil fuels more expensive, in turn encouraging utilities, businesses and consumers to use less of them. At the same time, it makes alternatives, such as wind and solar power more competitive – encouraging their use. When designed and implemented properly, carbon taxes raise the price of carbon-intensive goods and lower the prices of non-carbon-intensive goods.

Finland - Country - Carbon - Tax - October

Finland was the first country to establish a carbon tax in 1990. As of October 2018, about 25 governments – including national, state, provincial and local jurisdictions – were levying them, according to the World Bank.

The revenue carbon taxes generate are either distributed as dividends to the public or spent on a government priority, sometimes tied to climate change. An example of this would be supporting renewable energy innovation.

Systems - Governments

With cap-and-trade systems, governments establish...
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