Episode 147: Which is better, a revenue-neutral carbon tax or a cap-and-trade program?

Nick Muller
, a visiting professor at Carnegie Mellon University, responds to a listener who wonders if a carbon tax is a better solution than a cap-and-trade program.



Learn more

Market-based Emissions Regulation When Damages Vary Across Sources: What are the Gains from Differentiation? by Meredith Fowlie and Nicholas Muller

Location Key to Pollution’s Real Cost from the Journal of Yale School of Forestry & Environmental Studies

Evaluating the Policy Trade–Offs in ARB’s Cap–and–Trade Program from the California Legislative Analyst’s Office


HOST: An Energy Bite listener asked the following question: Which is better, a revenue-neutral carbon fee-and-dividend price on carbon pollution or a cap-and-trade program such as is promoted by the EPA power plant rules? On this week’s Energy Bite, Nick Muller, a visiting professor at Carnegie Mellon University, has some answers.

MULLER: There are many factors that determine whether a carbon tax or a cap-and-trade program are preferred. With full information regarding the costs of pollution control, using either taxes or cap-and-trade makes no difference in terms of efficiency. However, it should be obvious that regulators do not have complete information on costs. These are a function of specific technologies used by firms as well as the costs of their inputs, like fuel and labor.

HOST: So, what happens when costs are not known?

MULLER: When costs are not known, the equivalence between taxes and cap-and-trade breaks down. Research suggests that damages increase very slowly with additional CO2 emissions. As such, the regulator should elect to use an emission tax. The additional benefit of an emission tax is the ability of the regulator to use tax revenue for productive purposes. One such purpose is rebates to low or middle income households to offset higher energy costs.

HOST: Do you prefer a carbon tax or a cap and trade program? Take our poll, see the results, and ask your energy questions at Energy Bite dot org.

ANNOUNCER: Energy Bite is a co-production between 90.5 WESA and Carnegie Mellon’s’ Scott Institute for Energy Innovation.


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