Carbon Trading and Carbon Taxes (Evaluation Skills Video)

In this short revision video we analyse and evaluate three key points relating to this question: "To what extent are tradable permits less effective than taxation in reducing CO2 emissions?"

Core Notes:

A rising price of carbon permits – in theory – gives firms an incentive to invest in new technologies that lower carbon emissions.

Eval: But if the carbon price is too low or volatile from year to year, the risks from investment will be hard to justify to shareholders and fewer firms will commit to this.

Carbon trading helps to cut emissions in the lowest cost way because each permit is worth more to the most carbon-efficient businesses.

Eval: Carbon trading raises less revenue than a carbon tax; this revenue could be used to fund investment in renewables or help finance improvements in human capital.

The UK government has introduced a carbon price floor to make the EU trading scheme more effective in cutting CO2 emissions.

Eval: Carbon price floors make domestic businesses less price competitive overseas. A carbon tax provides just as much certainty for firms.