"Tax carbon!"

"Put a cap on emissions!"

"Taxing carbon is simpler!"

"An emissions cap is more effective!"

Carbon tax or Cap 'n Trade?  Which is better?

While there is a consensus from economists that putting a price on carbon is a potent way of reducing CO2 emissions, the mechanism for pricing carbon is much debated. To get a sense of how much of a debate, Google "carbon tax vs cap 'n trade", the two major mechanisms and you see millions of hits. So which is better - carbon tax or cap 'n trade?  Let's begin to answer this question with understanding the difference between the two. 

Both deal with a price on carbon and the quantity of CO2 emissions. And from fundamental economics, it is important to know that the two are related. With a carbon tax, the government sets a price through a tax rate. With the right rate, the market responds by lowering CO2 emissions as it adjusts to the additional cost on carbon. In contrast, cap 'n trade works in the opposite direction. The government sets the CO2 emissions level to achieve climate goals and then lets the market determine the carbon price via a CO2 emission voucher market created by the government.

Reading through the vast number of references arguing one over the other, I personally think cap 'n trade is a better path - theoretically. My logic stems from the fact that setting the CO2 emission more directly aligns with achieving the goal - to eventually get rid of CO2 emissions. Whereas with a carbon tax, setting a carbon price, one does not know what the CO2 emission impact will be.  

However...

The bottom line to me is the goal...eliminating CO2 production and the removal of excess CO2 already in the atmosphere. I try to never forget this. Therefore in my mind, the bigger question is, “How do we achieve our climate goals fastest at the most reasonable cost?”

So when it comes to the carbon tax vs cap ’n trade debate, I can't help but think about a Yogi-ism from Yogi Berra, that famous NY Yankee player/coach. Legend has it that in giving directions to his home, Yogi said to a friend, "When you come to a fork in the road, take it."  Taken literally, it sounds strange but within the context, it made sense since both paths led to the same destination.

Carbon tax follows a specific route. Cap ’n trade follows different but parallel route. Both have pros and cons. Both look to lead to the same goal. Right now politically, a carbon tax has a much higher probability of passing Congress than the creation of a cap 'n trade system. So, if a tax gets us to our goal faster, then I’m for it.

Who knew a Yogi-ism could provide insight into addressing decarbonization?