This paper examines the relative attractions of a carbon tax, a “pure” cap-and-trade system, and a “hybrid” option (a cap-and-trade system with a price ceiling and/or price floor). The paper shows that the various options are equivalent along more dimensions than often are recognised. In addition, the authors bring out important dimensions along which the approaches have very different impacts. Several of these dimensions have received little attention in prior literature. A key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid large wealth transfers to oil exporting countries.
California is both one of the largest economies and one of the largest emitters globally, making its climate change policies some of the most important in the world. They are also some of the most ambitious.
The global economy produces energy from two sources: a polluting non-renewable resource and a renewable resource. Transforming crude energy into ready-to-use energy services requires costly processes and more efficient energy transformation rates are more costly to achieve.
Two simultaneous and interdependent issues challenge today’s development policy: poverty reduction and climate change.