Carbon Emissions Trading vs Carbon Taxes: What’s the Difference?
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Carbon emissions trading systems and carbon taxes are two highly debated methods of carbon emission reduction that can help mitigate climate change and lead to a sustainable planet for future generations. But since their methodology is different, it is important to understand how each of them works. So, we had to ask: What’s the difference between carbon emissions trading and carbon taxes?
Carbon emissions trading sets an upper limit on total carbon emissions, allowing entities to trade credits according to their usage. Carbon taxes are a price tag put on fossil fuel emissions to disincentivize their use and promote a switch to green energy. Both are types of carbon pricing.
In the fight against climate change, how can we tell the difference between carbon emissions trading and carbon taxes? Below we will define both terms, identify the key advantages and differences of each, explore how they operate and what impact they have on carbon emissions, and discuss why they are both important in the fight against climate change.
How Are Carbon Emissions Trading and Carbon Taxes Defined
Carbon emissions trading (CET) systems and carbon taxes are sustainability tools that can help individuals and organizations lower their carbon footprints. Each is used to accomplish specific, and very different, tasks but their overall goal is to reduce global carbon emissions.
What Does the Dictionary Say About Carbon Emissions Trading and Carbon Taxes
Carbon emissions trading (CET) is a form of carbon pricing that places a limit on pollution emissions. CET systems became established after the Kyoto Protocol, an international treaty, set a maximum amount of greenhouse gas (GHG) emissions that could be released into the atmosphere, both globally and nationally.
“Carbon Trading: a system for controlling pollution. Companies and governments can buy or sell licenses to produce carbon dioxide”Cambridge Dictionary
The two main components of CET systems are the limit on pollution and the tradable allowances. Each entity operating under a CET system is issued a certain number of carbon credits each year. Carbon credits are tradable certificates or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2 or the equivalent amount of a different greenhouse gas (GHG).
Another form of carbon pricing is carbon taxes, fees placed directly on the burning of fossil fuels (i.e., coal, oil, and natural gas). It is the only way to make users of fossil fuels pay for the social, economic, and environmental damage caused when carbon is released into the atmosphere.
“Carbon Tax: a tax on the use of fuels that produce gasses that harm the atmosphere”Cambridge Dictionary
Carbon emissions already have a price tag attached to them, but it is our environment that pays the price, not the emitters. Carbon taxes seek to resolve this issue and make the emitters pay for their carbon emissions. Placing the tax on the fuel itself creates a monetary disincentive that promotes the switch to greener energy by making it more economically rewarding to use non-fossil fuels.
What Are the Differences Between and Advantages of Carbon Emissions Trading and Carbon Taxes
Both CET systems and carbon taxes represent ways in which we can mitigate carbon emissions and global warming. But they are also different methods of climate action with different environmental impacts, making it important to understand their differences.
The main difference between carbon emissions trading (CET) systems and carbon taxes involves the price of emissions and the total amount of emissions reduction. The amount of total emissions reduction is predetermined with CET systems, but the price of emissions is not. And the reverse is true of carbon taxes. The price of emissions is pre-determined with carbon taxes, but the total amount of emission reduction is not.
The following are key advantages of CET systems:
- Caps on carbon emissions can be set strictly
- Unused carbon credits can be traded to other companies
- Incentivizes companies to invest in greener technologies
The following are key advantages of carbon taxes:
- They generate revenue for governments to develop green energy
- Different fossil fuels can be taxed at different rates
- They provide social, economic, and environmental benefits
How Do Carbon Emissions Trading and Carbon Taxes Impact Your Carbon Footprint
Choosing either CET systems or carbon taxes is great if you are looking to lower your carbon footprint. Knowing their similarities and differences is important when making a decision of which to use.
|Carbon Emissions Trading||Carbon Taxes|
|How are carbon emissions reduced||Carbon credits cap how much CO2 can be emitted by an entity. This cap on emissions can be gradually reduced over time, leading to less and less overall emissions.||A fee is placed on fossil fuels, which creates a monetary incentive to switch to greener forms of energy.|
|Impact on own carbon emissions||Carbon credits do not directly reduce your carbon footprint.||Carbon taxes do not directly reduce your carbon footprint.|
|Impact on global carbon emissions||Carbon credits mitigate the problem, but they do not work at the core issue of reducing overall CO2 emissions.||Carbon taxes work at the core issue of reducing overall CO2 emissions.|
|Environmental benefits||Carbon credits facilitate the switch to greener energy sources and promote energy independence.||Carbon taxes facilitate the switch to greener energy sources and promote energy independence.|
|Overall effectiveness in reducing carbon emissions||Improper reporting and discrepancies in maximum GHG levels between countries limits carbon credit effectiveness on a global scale.||Carbon taxes are effective if they are complemented by programs that ensure people are not made worse off from increases in fossil fuel costs.|
How Do Carbon Emissions Trading and Carbon Taxes Reduce Carbon Emissions
The goal of both CET systems and carbon taxes is to reduce carbon emissions in order to mitigate climate change.
- CET systems: Carbon credits represent indirect emission reductions. Putting a cap on emissions and decreasing this cap over time reduces carbon emissions over time, preventing CO2 from entering the atmosphere.
- Carbon taxes: Taxes represent indirect emission reductions. A price is placed on emitting fossil fuels, which creates a monetary incentive to switch to greener forms of energy with less carbon emissions.
When you hear the words “carbon credit”, think about the term “allowance”. Carbon credits represent the maximum amount of CO2 an entity is allowed to emit. This cap on CO2 emissions slowly decreases over time, forcing entities to emit less and less CO2 to stay within the boundaries of the cap. Companies with high levels of emissions can continue to operate, but only at an increased cost.
When you hear the words “carbon tax”, think about the term “price tag”. Governments set prices that emitters must pay for each metric ton equivalent of carbon they emit. Carbon taxes force emitters to take steps to reduce their emissions in order to avoid paying this tax. The less carbon they emit, the less money they spend, and the less carbon gets released into our atmosphere.
What Impact Do Carbon Emissions Trading and Carbon Taxes Have on Your Own Carbon Emissions
One of the best ways we can aid in the fight against global climate change is to reduce our carbon footprint. And to do this we first have to reduce our own carbon emissions.
- CET systems: Carbon credits do not directly reduce your carbon footprint.
- Carbon taxes: Carbon taxes do not directly reduce your carbon footprint.
Carbon credits do not directly reduce your own carbon emissions. Setting a limit on allowable carbon emissions is an indirect method of emissions reduction because companies can continue to emit as long as they pay the price.
Carbon taxes do not directly reduce your own carbon emissions. Putting a price tag on carbon emissions is an indirect method of emissions reduction because people can continue to emit as long as they pay the price.
Coupled with direct measures of emission reductions, such as reducing individual energy usage and consumption, carbon credits and carbon taxes can become more effective.
What Impact Do Carbon Emissions Trading and Carbon Taxes Have on Global Carbon Emissions
Every year we pump over 36 billion tons of CO2 into the atmosphere, fueling climate change. This causes temperature and sea-level rise, melting of sea ice, changing precipitation patterns, and ocean acidification. CET systems and carbon taxes aim to reduce global emissions and mitigate these negative environmental effects.
- CET systems: Carbon credits do not work at the core issue of reducing overall CO2 emissions.
- Carbon taxes: Carbon taxes work at the core issue of reducing overall CO2 emissions.
Carbon credits do not have a significant impact on global carbon emissions. Although they may incentivize companies to reduce their CO2 emissions, the immediate effect of reducing emissions under the cap-and-trade system is to benefit a company’s bottom line. The direct goal of carbon permits is not to reduce greenhouse emissions or support sustainable energy projects, but rather for companies to make money.
Carbon taxes have a significant impact on global carbon emissions. Carbon taxes internalize external costs on the environment by adding them onto the price of fossil fuels. In this way, the producer and consumer pay for the full price of fossil fuels, including external costs to the environment. Higher prices disincentivize the use of carbon-intensive goods, which leads to a reduction in total carbon emissions.
The COVID-19 pandemic triggered the largest decrease in energy-related carbon emissions since World War II, a decrease of 2 billion tonnes. However, emissions rebounded quickly and rose by 6% in 2021 to 36.3 billion tonnes, their highest ever level. This indicates that the earth is still warming at an accelerated rate, and still not enough is being done to implement direct carbon reduction measures.
What Are the Environmental Benefits of Carbon Emissions Trading and Carbon Taxes
Using CET systems and carbon taxes can reduce our consumption of fossil fuels which, in turn, reduces our carbon footprint. But their benefits go beyond reducing your overall carbon emissions to balance off your personal carbon footprint. They also come with various environmental benefits.
- CET systems: Carbon credits facilitate the switch to greener energy sources and promotes energy independence.
- Carbon taxes: Carbon taxes facilitate the switch to greener energy sources and promote energy independence.
CET systems and carbon taxes incentivize companies to switch to greener energy sources including solar, wind, hydro, and geothermal energy. They do not emit CO2, nitrogen oxides, sulfur dioxides, or mercury into the atmosphere, soil, or water. And these pollutants are known to contribute to the thinning of the ozone layer, global sea-level rise, and the melting of our world’s glaciers.
Switching from fossil fuels to green energy also promotes energy independence. Being able to produce your electricity without the aid of foreign countries is an important step in becoming more self-sufficient.
How Effective Are Carbon Emissions Trading and Carbon Taxes in Reducing Carbon Emissions
CET systems and carbon taxes can be effective at reducing carbon emissions if they are used correctly.
- CET systems: Carbon credits face improper reporting and discrepancies in maximum GHG levels between countries which can limit effectiveness on a global scale.
- Carbon taxes: Placing a price directly on fossil fuels is effective at reducing global carbon emissions if there are contingencies in place to ensure increasing costs do not cause unnecessary hardships for people.
Carbon credits have faced criticism because most industries lack the technology that monitors and determines their amount of CO2 emissions. This makes it easier for companies to cheat on their emissions reports and say they are emitting less than they actually are. Also, different countries have different standards and caps for CO2 emissions. If the cap is set too high, then companies are not incentivized to reduce emissions. But set the cap too low, and companies will be overly burdened to reduce emissions. And the extra cost will be passed down to consumers as a result.
The world’s first and largest CET system in operation is the European Union emissions trading scheme, which was established in 2005. 11,000 installations and a few hundred aircraft operators in Europe are required to participate in the scheme.
Carbon taxes are effective at reducing carbon emissions because they force emitters to pay for fossil fuel emissions. The money generated from a carbon tax could then be used to offset energy costs for low income families, fund green energy technology, help combat climate change, or be given back to citizens as a dividend. But taxes can only be effective if they are complemented by programs that ensure people are not made worse off from increases in fossil fuel costs. Fossil fuels have been powering economies for over 150 years and currently supply approximately 80% of the world’s energy. Increasing the cost of fossil fuels could cause economic hardship for a large percentage of the world.
Finland was the first country to implement a carbon tax back in 1990, and now there are 64 carbon pricing policies (carbon taxes and cap-and-trade policies) in operation worldwide. 35 of these are carbon tax programs. As of 2021, Sweden had the highest and Poland the lowest carbon tax at $137 and <$1 per metric ton of CO2 equivalent, respectively. The United States and Australia are currently the only two developed countries without some form of carbon pricing.
Why Are Both Carbon Emissions Trading and Carbon Taxes Important to Fight Climate Change
CET systems and carbon taxes are important to fight climate change because they are both ways to reduce carbon emissions. Reducing emissions is important because it mitigates the effects of climate change, which has a positive cascade effect on public health and plant and animal diversity. In addition, this boosts the global economy and leads to innovative, more environmentally-friendly solutions.
However, we can’t let these two methods be a guilt-free way to reduce carbon emissions. CET systems and carbon taxes must be used in conjunction with direct carbon reduction measures until the industry has time to invest, develop, and refine more sustainable innovations.
What are Better Alternatives to Carbon Emissions Trading and Carbon Taxes
If used correctly, CET systems and carbon taxes can provide environmental, economic, and social benefits that go beyond reducing carbon emissions. They have the potential to instigate meaningful environmental change and begin to reverse some of the effects of climate change.
But in the long term, direct methods of carbon footprint reduction are much more effective. These reduction measures don’t have to involve drastic changes either. Actions that may seem small can have a big impact because those small changes add up! You can reduce your carbon footprint in three main areas of your life: household, travel, and lifestyle.
Reduce your household footprint:
- Wash with cold water: Washing clothes in cold water could reduce carbon emissions by up to 11 million tons. Approximately 90% of the energy is used to heat the water, so switching to cold saves also saves energy.
- Replace incandescent bulbs with fluorescent bulbs: Fluorescent bulbs use 75% less energy than incandescent ones, saving energy and thus reducing electricity demand and greenhouse gas emissions.
Reduce your travel footprint:
- Fly less: Aviation accounts for around 1.9% of global carbon emissions and 2.5% of CO2. Air crafts run on jet gasoline, which is converted to CO2 when burned.
- Walk or bike when possible: The most efficient ways of traveling are walking, bicycling, or taking the train. Using a bike instead of a car can reduce carbon emissions by 75%. These forms of transportation also provide lower levels of air pollution.
Reduce your lifestyle footprint:
- Switch to Renewable Energy Sources: The six most common types of renewable energy are solar, wind, hydro, tidal, geothermal, and biomass energy. They are a substitute for fossil fuels that can reduce the effects of global warming by limiting global carbon emissions and other pollutants.
- Recycle: Recycling uses less energy and deposits less waste in landfills. Less manufacturing and transportation energy costs means less carbon emissions generated. Less waste in landfills means less CH4 is generated.
- Switch from single-use to sustainable products: Reusing products avoids resource extraction, reduces energy use, reduces waste generation, and can prevent littering.
- Eat less meat and dairy: Meat and dairy account for 14.5% of global greenhouse gas emissions, with beef and lamb being the most carbon-intensive. Globally, we consume much more meat than is considered sustainable, and switching to a vegan or vegetarian diet could reduce emissions.
- Take shorter showers: Approximately 1.2 trillion gallons of water are used each year in the United States just for showering purposes, and showering takes up about 17% of residential water usage. The amount of water consumed and the energy cost of that consumption are directly related. The less water we use the less energy we use. And the less energy we use, the less of a negative impact we have on the environment.
In short, CET systems and carbon taxes are not the same. CET systems utilize carbon credits as tradable certificates or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2. Carbon taxes are a price tag put on fossil fuel emissions to disincentivize their use and promote the switch to green energy.
The total amount of emissions reduction is predetermined with CET systems but not with carbon taxes. And the price of carbon emissions is predetermined with carbon taxes but not with CET systems.
Both are tools in our sustainability toolbox that can reduce carbon emissions and mitigate climate change. But we should not rely on either or both to be a cure-all for our environmental problems. Direct measures of carbon emission reduction are much more effective at reducing emissions both in the short term and the long term.
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