Editing Emissions trading (section)

==Comparison with other methods of emission reduction==
Cap and trade is the textbook example of an ''emissions trading program''. Other market-based approaches include '''baseline-and-credit''', and '''pollution tax'''. They all put a price on pollution (for example, see [[carbon price]]), and so provide an economic incentive to reduce pollution beginning with the lowest-cost opportunities. By contrast, in a command-and-control approach, a central authority designates pollution levels each facility is allowed to emit.  Cap and trade essentially functions as a tax where the tax rate is variable based on the relative cost of abatement per unit, and the tax base is variable based on the amount of abatement needed.{{citation needed|date=April 2018}}

=== Baseline and credit ===
In a baseline and credit program, polluters can create permits, called credits or offsets, by reducing their emissions below a baseline level, which is often the historical emissions level from a designated past year.<ref name=glossary>{{cite web |publisher=Center for Climate and Energy Solutions |title=Cap and Trade: Key Terms Glossary |work=Climate Change 101 |date=January 2011 |url=http://www.c2es.org/docUploads/climate101-captrade.pdf|access-date=27 October 2014 |archive-url=https://web.archive.org/web/20171005153958/http://www.c2es.org/docUploads/climate101-captrade.pdf |archive-date=2017-10-05 |url-status=dead}}</ref> Such credits can be bought by polluters that have a regulatory limit.<ref name=EC_1>{{Cite web |last=Chomitz |first=Kenneth M. |year=2000 |title=Evaluating Carbon Offsets from Forestry and Energy Projects: How Do They Compare? |url=http://hdl.handle.net/10986/19838| access-date=2 January 2024| ssrn=630729 |publisher=World Bank |series=Policy Research Working Paper Series |volume=2357|doi=10.1596/1813-9450-2357 |hdl=10986/19838 }}</ref>

===Pollution tax===
{{Main|Ecotax}}
Emissions fees or environmental tax is a surcharge on the pollution created while producing goods and services.<ref name="rosengayer">{{cite book |last1=Rosen |last2=Gayer |first1=Harvey S. |first2=Ted |title=Public Finance |year=2008 |publisher=McGraw-Hill Irwin |location=New York |isbn=978-0-07-351128-3 |pages=90–94}}</ref> For example, a [[carbon tax]] is a tax on the carbon content of [[fossil fuels]] that aims to discourage their use and thereby reduce carbon dioxide emissions.<ref name=glossary/> The two approaches are overlapping sets of policy designs. Both can have a range of scopes, points of regulation, and price schedules. They can be fair or unfair, depending on how the revenue is used. Both have the effect of increasing the price of goods (such as fossil fuels) to consumers.<ref name=":0">{{Cite book|title = Carbon Tax and Cap-and-trade Tools : Market-based Approaches for Controlling Greenhouse Gases|last = Burney|first = Nelson E.|publisher = [[Nova Science Publishers, Inc.]]|year = 2010|isbn = 9781608761371|location = New York}}</ref>  A comprehensive, upstream, auctioned cap-and-trade system is very similar to a comprehensive, upstream carbon tax. Yet, many commentators sharply contrast the two approaches.

The main difference is what is defined and what derived. A tax is a price control, while a cap-and-trade system is a quantity control instrument.<ref name=":0" /> That is, a tax is a unit price for pollution that is set by authorities, and the market determines the quantity emitted; in cap and trade, authorities determine the amount of pollution, and the market determines the price.<ref>{{cite journal|last1=Durning|first1=Alan|title=carBon tax vS. cap and trade|journal=Cap and Trade 101 a Federal Climate Policy Primer|date=July 2009|page=28|url=http://www.sightline.org/wp-content/uploads/downloads/2012/02/Cap-Trade_online.pdf|access-date=27 October 2014|url-status=dead|archive-url=https://web.archive.org/web/20140707153526/http://www.sightline.org/wp-content/uploads/downloads/2012/02/Cap-Trade_online.pdf|archive-date=7 July 2014}}</ref> This difference affects a number of criteria.<ref name="rosengayer"/>

'''Responsiveness to inflation:''' Cap-and-trade has the advantage that it adjusts to [[inflation]] (changes to overall prices) automatically, while emissions fees must be changed by regulators.

'''Responsiveness to cost changes:''' It is not clear which approach is better. It is possible to combine the two into a safety valve price: a price set by regulators, at which polluters can buy additional permits beyond the cap.

'''Responsiveness to recessions:''' This point is closely related to responsiveness to cost changes, because recessions cause a drop in demand. Under cap and trade, the emissions cost automatically decreases, so a cap-and-trade scheme adds another [[automatic stabilizer]] to the economy—in effect, an automatic fiscal stimulus. However, a lower pollution price also results in reduced efforts to reduce pollution. If the government is able to stimulate the economy regardless of the cap-and-trade scheme, an excessively low price causes a missed opportunity to cut emissions faster than planned. Instead, it might be better to have a price floor (a tax). This is especially true when cutting pollution is urgent, as with greenhouse gas emissions. A price floor also provides certainty and stability for investment in emissions reductions: recent experience from the UK shows that nuclear power operators are reluctant to invest on "un-subsidized" terms unless there is a guaranteed price floor for carbon (which the EU emissions trading scheme does not presently provide).

'''Responsiveness to uncertainty:''' As with cost changes, in a world of uncertainty, it is not clear whether emissions fees or cap-and-trade systems are more efficient—it depends on how fast the marginal social benefits of reducing pollution fall with the amount of cleanup (e.g., whether inelastic or elastic marginal social benefit schedule).

'''Other:''' The magnitude of the tax will depend on how sensitive the supply of emissions is to the price. The permit price of cap-and-trade will depend on the pollutant market. A tax generates government revenue, but full-auctioned emissions permits can do the same. A similar upstream cap-and-trade system could be implemented. An upstream carbon tax might be the simplest to administer. Setting up a complex cap-and-trade arrangement that is comprehensive has high institutional needs.<ref>Calel, Raphael, [http://www.ucl.ac.uk/opticon1826/archive/issue9/researchnotes/S_H_Calel.pdf "The Language of Climate Change Policy"] {{Webarchive|url=https://web.archive.org/web/20210224202657/https://www.ucl.ac.uk/opticon1826/archive/issue9/researchnotes/S_H_Calel.pdf |archive-url=https://ghostarchive.org/archive/20221009/https://www.ucl.ac.uk/opticon1826/archive/issue9/researchnotes/S_H_Calel.pdf |archive-date=2022-10-09 |url-status=live |date=2021-02-24 }}, 2010.</ref>

===Command-and-control regulation===

Command and control is a system of regulation that prescribes emission limits and compliance methods for each facility or source. It is the traditional approach to reducing air pollution.<ref name=glossary/>

Command-and-control regulations are more rigid than incentive-based approaches such as pollution fees and cap and trade. An example of this is a performance standard which sets an emissions goal for each polluter that is fixed and, therefore, the burden of reducing pollution cannot be shifted to the firms that can achieve it more cheaply. As a result, performance standards are likely to be more costly overall.<ref name="rosengayer" /> The additional costs would be passed to end consumers.<ref>{{cite journal|year=2012|author1=Yujie Lu |author2=Xinyuan Zhu |author3=Qingbin Cui |title=Effectiveness and equity implications of carbon policies in the United States construction industry|journal=Building and Environment|volume=49|pages=259–269|publisher=Elsevier Ltd.|doi=10.1016/j.buildenv.2011.10.002|bibcode=2012BuEnv..49..259L }}</ref>