Essay: Carbon Tax Vs. Cap-and-Trade: Differences And Effectiveness

Write a report to critically analyse the following environmental tax policy tools as regards its application in the United Kingdom:

I. Cap and Trade
II. Carbon Tax

With respect to the fundamental differences and the effectiveness towards achieving the global 2oC environmental commitments by 2050.

Carbon tax

In the era of twenty-first centuries, the businesses are growing like mushrooms all over the world. There is not any doubt that the world economy is getting high benefits from this large number of businesses, but there are major negative consequences of these businesses. One of the major negative effects is that the environment is getting highly affected with these businesses (Abdullah and Morley 2014). This threat on the environment is increasing day by day with the progress of businesses all over the world. These environmental challenges are creating immense pressure on the government for the reduction of the environmental damage. The major challenge to the government is the reduction of harms on environment while not affecting the economic growth. For this reason, the governments have a range of tools that help in the reduction of the negative effects of the environment (Krass, Nedorezov and Ovchinnikov 2013). One of such tools is the environment tax policy that plays an integral part in minimizing the damage of environment. There are several advantages of the environmental taxes; they are environmental effectiveness, economic efficiency, raising public revenues, brings transparency and many others. There are other major issues that need effective environmental policies to be settled down; some of them are waste management, prevention of water and air pollution, carbon emission and others. There are some major reasons behind the implementation of environmental taxes; like environmental taxes directly address the issue of market failure with the help of environmental pricing; it helps the business organizations to reduce the damage on environments; to improve competitiveness with the help of low-emission alternatives; to bring transparency and others (Liu 2013). The main objective of this report is to analyze and evaluate various aspects of carbon tax and cap and trade tax. In order to do this, the differences and effectiveness between these two taxes are discussed.

Carbon tax refers to the fees that is charged on the burning of carbon-based fuels like oil, coal, gas and many others (Dissou and Siddiqui 2014). On a more precise note, it can be said that carbon tax refers to the core policy for the reduction and elimination of the use of fossil oil and fossil fuels. The fossil oil and fossil fuels is very much harmful for the environment as they destabilize and destroy the climate. Carbon tax plays an important part, as it is the only way to enforce the carbon fuel users to pay taxes on their consumption of carbon fuels. Hence, it can be said that the carbon tax passively reduces the damage caused by the carbon dioxide and other carbon gases. In case the government of the countries is able to implement carbon tax properly, it is a powerful tool to motivate the users to reduce the aspects of carbon emission by making this more economically rewarding to move in the use of non-carbon fuels and energies in the most effective way. There are some specific ways to implement carbon tax. A carbon tax is paid when there is an extraction of fuels from the Earth and it is used for the commercial purposes. The payment of carbon tax provides the consumers with the opportunity of producing a monetary incentive in reducing the carbon dioxide emissions. Apart from this, the carbon tax has its importance in providing social and economic benefits to the users (Aghion et al. 2016). This tax helps to increase the amount of revenues without affecting the economy. In addition, carbon tax helps to promote the major objectives of the policies regarding the climate change. Thus, it can be understood that carbon tax is a major tax to prevent carbon pollution.

Cap and trade

Cap and Trade also has its importance to prevent the carbon emission. Cap and trade is an important approach to cap and control the effects of green house emission that is a major reason of global warming. The main aim of this policy is to put a control over the large amount of green house gas emission from various sources (Zhang and Xu 2013). In the cap and trade policy, an overall maximum cap is set for the emission of green house per stipulated compliance period. With the assistance of cap and trade policy, the authority is able to control the green gas emission that can be lowered on a time-to-time basis. Cap and trade policy works in a particular manner. In this particular policy, the government uses to set a maximum tolerable level of the green house pollution and the companies need to pay the taxes in case their pollution level goes beyond the set level. This is considered as a sure way to minimize the effects of carbon and green house emission. This maximum tolerable level of carbon emission is measured based on billions of tons of carbon dioxide per year. Cap and trade includes different kinds of emission like natural gas emission, carbon dioxide emission, electricity generation emission, and carbon emission from transportation and many others (Dong et al. 2016). As per the directions of the governments of the various countries, it is mandatory for the companies and other users to obey the policy of cap and trade in order to decrease the level of carbon emission. The consumers and the users use to get economic incentives in case they succeed in the reduction of carbon pollution. Hence, from the above discussion, it can be understood that the cap and trade policy plays an integral part in preventing the carbon emission pollution.

From the above discussion, it can be seen that there are some major fundamental differences between the taxation policies of carbon tax and cap and trade taxation. There is not any differences of this fact in case of the business environment of United Kingdom. Most of the economists of United Kingdom argue that the carbon and green house emissions will be excessive in case the businesses have the permit to act freely in the market (He et al. 2015). For this reason, there is a recommendation from the side of the economists about the implementation of some kind of taxes. As per this recommendation, the polluters need to pay a certain amount of money in case they cross the predetermined level of the emission of carbon dioxide and other green house gases. This is called the environmental Tax. This tax can be applied as the form of carbon tax or cap-and-trade scheme. In the United Kingdom, a carbon tax is imposed on the emission of each unit if emission of green house gas and other carbon dioxide gases. In the policy of carbon tax, the companies have the opportunity to get financial incentives by complying with the regulations of carbon emission. Thus, it can be seen that the selected level of tax determines the quality of reduced pollution. In case of the carbon tax setting process, the cost of damage associated with each unit is assessed. This cost helps to control the pollution related with the emission of carbon and other green house gases (He, Wang and Wang 2012).

Differences between carbon tax and cap-and-trade policy

However, there are differences between carbon tax and cap-and-trade policy. In the policy of cap and trade, a maximum level of pollution is set that is known as cap. In the process of cap and trade policy, the authority uses to distribute the emission permits among the business organizations of United Kingdom. As per the policy of cap and trade, it is the responsibility of the business organizations to have the required emission permit in order to cover the units of pollution that generate from their business operations (Goulder and Schein 2013). The business organizations of United Kingdom can have the above mentioned pollution permits from various legal sources; like with the help of initial allocation; from the auctions; with the help of trading from the other companies. Hence, from the discussion so far, it can be seen that there are some basic differences between the policy of carbon tax and cap and trade policy (Bond 2012). Carbon tax policy enforces the companies to pay certain amount of taxes and in return, they allow these companies to pollute the environment with carbon emission. On the other hand, by setting the maximum level of pollution, the cap-and-trade policy helps in the reduction of the level of emission of carbon and other green house gases. From this, it can be said that the reduction of pollution level is always preferable than increasing the level of pollution and then to pay tax (Strand 2013). This is one of the fundamental differences between carbon tax and cap-and-trade policy.

Some of the companies in United Kingdom find it easier to reduce the pollution rather paying taxes for pollution. There are some important factors regarding the cap and trade policy that need to be mentioned. In case the maximum level of pollution is set in advance, there is a fluctuation in the trading price. It becomes expensive when the demand is high and the supply is low. On the other hand, it becomes cheaper when the demand is lower that supply. Due to this disparity between the demand and supply, there is a development of ceiling on the whole quantity of carbon emission (Sewalk 2012). There are many idealized situations where the outcome is same for both the carbon taxes and cap-and-trade taxes. However, in the real life situations, there are many differences between the policy of carbon  tax and cap-and-trade. Another major subject of differentiation between carbon taxation and cap-and-trade policy is the way of distribution of the cost to reduce pollution. In case of the policy of cap-and-trade, often it can be seen that the pollution permits are distributed on the free basis in the initial stages. It implies that the business organizations are able to cover the carbon emission of their businesses on a cheaper basis. For this reason, the cap and trade policy has much popularity among the companies. This can be considered as one of the major reasons behind the selection of cap-and-trade policy by most of the companies in United Kingdom (MacKenzie and Ohndorf 2012).

Factors influencing the choice between carbon tax and cap-and-trade policy

However, the situation is different in case of carbon tax. In case of the carbon tax, the business organizations have to pay a large amount of money in the initial stage as tax for pollution. Thus, a bigger initial cost hit the financial situation of the companies. This is a massive fundamental difference between carbon tax and cap-and-trade policy. Another major area of difference is the performance of these two policies under the uncertainty regarding the cost and benefits about the carbon emission (Harrison 2013). In case of carbon tax policy, the emitting price of the production units are set, but the emission quantity is not set. Thus, it can be seen that the implementation of carbon tax ensures that all have the information about the price being paid. However, in case of cap-and-trade policy, there is certainty about the emission quantity, but it fails to provide certainty regarding the costs to achieve the reductions. In case the level of damage of the environment is more sensitive, it is optimal to use the policy of cap-and-trade. On the other hand, in case the cost related with the pollution is higher and highly sensitive, it is better to adopt the policy of carbon tax (Perino 2015). Thus, from the above discussion, it can be seen that both carbon tax and cap-and-trade policy have their merits and demerits. Both these policies are suitable for some specific situations. However, it is clear that the aim of both carbon tax and cap-and-trade policy is to reduce the emission of carbon gas and other green house gases.

There is some major effectiveness of both carbon tax and cap-and-trade policy in the achievement of global 2oC environmental commitment by 2050. They are discussed below:

Carbon Tax: In the process of carbon tax policy, the business organizations have to pay large amount of taxes for the carbon emission. This process encourages the companies to develop alternatives to reduce the carbon emission (Baylis, Fullerton and Karney 2013). For this reason, the business organizations use to develop new techniques or new machineries for less carbon emission. This process will allow the less use of machineries for various purposes. It will provide health benefits as it will reduce the chances of heart attack. Apart from this, with the help of the money from carbon tax, the government will be able to develop various strategies to reduce the amount of pollution. With the help of stable carbon tax, the stable price of the carbons can be fixed. Thus, the companies can make effective investments decisions without the fear of the fluctuation in the regulation costs (Elliott and Fullerton 2014).

Performance under uncertainty

Cap and Trade: The most important factor of cap-and-trade is its efficiency. The cap-and-trade policy helps to create a new economic resource for the companies. The companies are able to reduce the amount of carbon emission with the help of a minimum initial cost (Fell et al. 2012). At the same time, the business organizations are able to get some economic benefits by lowering the level of pollution. There is a pre determined maximum level of carbon emission in cap-and-trade policy. With the help of this pre determined emission level, the business organizations can easily track the level of carbon emission from their business organizations. With the help of the policy of cap-and-trade, the common people have the chance to know many important information about the carbon emission (Taylor 2012). These are the major effectiveness of cap-and-trade policy.

Conclusion

The above study is about the analysis and evaluation of the aspects of carbon tax and cap-and-trade policy. From the above analysis, it can be seen that environmental taxation is an important aspect in order to reduce the environmental pollution causes by the business organizations. Two of the most important aspects of environmental taxes are the carbon tax and cap-and-trade policy. The main objective or aim of both these polices is to protect the environment from massive carbon emissions. From the above discussion, it can be seen that there are some major differences between carbon tax and cap-and-trade policy. As per the discussion, in case of carbon tax, the business organizations pay taxes and continue to pollute the environment. However, the case is different for cap-and-trade policy. In the policy of cap-and-trade, there is a per determined level of carbon emission and the companies have to pay taxes in case they cross that level. At the time of carbon tax, the companies need to pay a high amount of initial cost that hurt the financial positions of the companies. However, in case of cap-and-trade policy, the companies have to carry a minimum and cheaper amount of initial cots. In spite of the presence of these differences, both carbon tax and cap-and-trade policy play an important part in the reduction of carbon emission.

References

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