Carbon Pricing

Cap and Trade

Cap and trade is an approach that harnesses market forces to reduce emissions cost-effectively. Like other market-based strategies, it differs from “command-and-control” approaches where the government sets performance standards or dictates technology choices for individual facilities. Cap and trade allows the market to determine a price on carbon, and that price drives investment decisions and spurs market innovation.

Cap and trade differs from a tax in that it provides a high level of certainty about future emissions, but not about the price of those emissions (carbon taxes do the inverse). A cap may be the preferable policy when a jurisdiction has a specified emissions target.

For more information see Cap and Trade basics

The EU introduced the first and largest Cap and Trade system ETS

Carbon Tax

Under a carbon tax, the government sets a price that emitters must pay for each ton of greenhouse gas emissions they emit. Businesses and consumers will take steps, such as switching fuels or adopting new technologies, to reduce their emissions to avoid paying the tax.

A carbon tax differs from a cap-and-trade program in that it provides a higher level of certainty about cost, but not about the level of emission reduction to be achieved (cap and trade does the inverse).

Taxes on greenhouse gases come in two broad forms: an emissions tax, which is based on the quantity an entity produces; and a tax on goods or services that are generally greenhouse gas-intensive, such as a carbon tax on gasoline. 

For more information see Carbon Tax basics