How is cap-and-trade different from a tax?
Cap-and-trade sets the limit for emissions and lets the market work out the costs of hitting that limit. A tax sets a price for emissions and lets the market work out how much of a reduction in emissions will happen. Both can work if designed and implemented properly, but the challenges are different. A tax provides price stability for those who will pay it, but the environmental benefit is not assured because emissions will not fall if people are willing to pay higher costs. Taxes at the rate needed to send the price signal needed to reduce carbon and spur reduction innovations are difficult to put in place and adjust over time. Cap-and-trade provides certainty of environmental performance but the costs are uncertain and will vary over time. It may be easier to put in place but more challenging to implement.
