Putting a Price on Carbon: The Social Cost of Carbon? Cap and Trade? Carbon Tax?

January 31, 2018

Carbon is the leading cause of global climate change, and carbon pricing offers a tangible, financial penalty greenhouse gas emissions. According to many economists, climate change is a “market failure.”Society at large bears the cost of emitting CO2, while the polluters accrue the benefits.

The EPA and other government agencies use estimates of the social cost of carbon (SC-CO2), a dollar value given to measure the long term damage caused by of a ton of carbon in a year, to weigh the potential economic effects of climate change and climate change policy. SC-CO2 is intended to be a fully comprehensive measure of the economic effects of greenhouse gas emissions, and includes changes in net agricultural productivity, human health, property damage, and changes in energy system costs, but the predicted changes are, some argue, missing crucial information due to the lack of information and research on the precise nature of the damage from climate change.

A March, 2017 executive order from President Trump took on the social cost of carbon. The executive order returns to using data from 2003 to calculate SC-CO2, and disbands the non-partisan group of scientists who estimate SC-CO2.

The two main types of policies use throughout the world to create a financial penalty for greenhouse emissions are a carbon tax and cap and trade. Both cap and trade and a carbon tax encourage the lowest cost emission reductions, generate government revenue, and provide an incentive for investors and entrepreneurs to develop low-carbon technologies.

A carbon tax creates a stable, direct price on greenhouse gas emissions, whereas a cap and trade policy establishes an emissions cap, or a set number of allowances of production of greenhouse gases each year. The carbon tax essentially sets the price of emissions and lets the market decide the emission reductions, whereas cap and trade sets the standard for emissions reductions and lets the market react. Both policies have their share of advantages and disadvantages, but cap and trade is arguably a favorite among environmental policy-makers while energy companies are usually on the record as preferring a carbon tax.

California has had a cap and trade program in place since 2013, and it is the fourth largest in the world. The state’s emissions trading system is projected to reduce greenhouse gas emissions from regulated carbon producers by at least 16 percent by the year 2020, and an additional 40 percent by the year 2030. 450 business responsible for 85 percent of the state’s greenhouse gas emissions are required to comply with the program.

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