Cap-and-Trade versus Carbon Tax: A Comparison and Synthesis

In order for the true cost of carbon to be represented in the market, its effects on the environment must be captured like any other externality, and subject to the same laws of supply and demand, setting a dynamic price of emissions in business.

This report by the Z/Yen Group examines the two primary market mechanisms available – cap-and-trade schemes, and carbon tax. Both bring the cost of carbon into the market, but by two very different routes. In the former, carbon emissions are capped, and shares of that amount established for trade on the market between emitters. In the latter, each type of fossil fuel is subject to a tax based upon the level of carbon emitted during its combustion, raising the cost of use.