Cap and Trade or Carbon Tax?

The debate about a cap and trade greenhouse gas (GHG) program versus a carbon tax GHG program is beginning to focus on where the money goes, particularly with respect to a cap and trade program.  To appreciate the monetary aspect, it is important to understand the basics of both programs.   

A GHG cap and trade program requires facilities to offset their actual emissions with allocated allowances and, if necessary, additional credits purchased from brokers.  If a facility’s emissions do not exceed its allocated allowances, it can trade (i.e., sell) its remaining allowances to another facility that did exceed its allocated allowances.  The facility would use a broker to sell its credits, who would in turn make a profit from buying and selling them.  The argument against the cap and trade program is that part of its cost will be borne by the consumer if facilities offset the cost of GHG credits by charging higher prices for their services.

A carbon tax is simply a fee that is based on a facility’s total GHG emissions.  The carbon tax is collected by the agency administering the tax program.  One positive aspect of the carbon tax proposals is that the carbon tax revenue would be returned to the tax paying public.

Similar to the economically friendly aspect of the carbon tax proposals, proponents of the cap and trade approach to regulating GHGs have also instituted a tax payer benefit option.  Specifically, Senator Diane Feinstein is proposing a plan that would return the revenue as part of a “cap and dividend” program.  It appears that this type of cap and trade program could receive support from both the Senate and House and thus move even closer to GHG reporting and regulation.