How is a cap and trade program different from a tax-based program?
Cap and trade programs and tax-based programs are similar in that they are market-based and create a price for emissions. It is this price that creates a financial incentive to reduce emissions. The fundamental difference between the two programs is the way in which they establish a price and reduce emissions. A cap and trade program determines a certain known limit on emissions, causing the price of allowances to be established by supply and demand. A carbon tax imposes a direct fee but does not set a limit on emissions. As a result, the emission reductions resulting from tax is unknown.
