Cap and Trade vs Carbon Tax: Environmental Regulatory Policy Tools

This assignment provides an in-depth analysis of cap and trade systems, including the European Emissions Trading System, and their effectiveness in reducing greenhouse gas emissions. It examines various studies and research papers on the topic, highlighting the advantages and disadvantages of cap and trade systems compared to carbon taxes. The assignment also explores the impact of these policies on energy markets and the environment, providing a comprehensive overview of the subject.

MANAGING ENERGY RESOURCES
AND REGULATIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................2
Overview.....................................................................................................................................2
Evaluation of regulatory instruments .........................................................................................3
Shaping of energy markets .........................................................................................................8
Impact of the management of energy resources..........................................................................8
Performance of European Emissions Trading System (EU ETS) ............................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
With advent of globalisation and liberalisation, there is an enormous amount of pressure
on sustenance through proper utilisation of natural resources. However, the incessant
exploitation not only hampered the environment but also brought radical changes in the climatic
patterns and ecological dis-balance as well. For this, the governments and international
regulatory bodies have tried to curb this situation by incorporating various agreements and
proposals. Global warning has an imperative contribution in increasing the atmospheric
temperature through carbon emissions in leaps and bounds which need immediate measures. It is
virtually impossible to put a complete restriction on all the commodities with processes (Koch
and et.al., 2014). This report is based on the objective of “less warming is better than more
warming” and has emphasis on two robust carbon reducing tools such as carbon tax and the cap
and trade to maintain the environment in proper order.

MAIN BODY
Overview
Carbon tax- It is one of the forms of carbon pricing that is levied on the use of carbon content of
fuels. This is an effective strategic tool that offers both economic and social profits. With
reference to this policy, there is an emphasis on promoting the policy change in the climate
related issues without any altercations in the financial cyclic order. This has put dramatic halt on
the emissions of GHG that conclude the extensive evaluation of this scheme through a set of
policies and guidelines for the encouragement to use the zero carbon substitutes like solar, wind
and also alleviating the collective conscience. Hereby, through setting a price on carbon would
pave the path of low carbon energy systems with the help of technological advancements.
Cap and Trade- It is one of the best climatic policies to bring equilibrium between the
environmental aspects and economic gains. This has been employed for decreasing the levels of
pollution in the surroundings. In this regard, the CAP infers the restrictive limits on the GHG
Illu
stration 1: Rising temperatures with Rising Risks

emissions which becomes stricter with passing time. The TRADE component gives insights on
the buying-selling of emissive amount at a certain amount in global marketplaces that assist in
cost effectiveness. It is one of the finest tools in recent times that put a hold on pollution levels
by putting penalties or banking them out in the future.
Evaluation of regulatory instruments
There have been rising concerns about the effectiveness amongst these two tools. It has
been assisted in mitigating the effects of variable climatic modifications to prevent the rise of
surface's temperature above 2 C.⁰
Differences-
Sl No. CARBON TAX CAP AND TRADE
1 It is related to lowering the emissions
through the market.
It is related to reaching the targeted
emissions level through the government
or regulatory bodies.
2 There is a breakage of tax regulations to
administer this price setting of the
market, resulting in lack of fairness while
employing it.
There is an efficiency prevailed while
allocating the free permits in terms of
finance towards few companies who uses
this tool .
3 It is quicker and simple to adopt in
practical applications.
It is more complex in practice with time
consumption.
4 This is better approach and is transparent
to implement as it mainly depends on the
current structure for conducting
administration works (Ke, Lu and Jin,
2015).
This is more susceptible to unethical
procedures like pitfalls in filling up
tenders etc. or lobbying.
5 It concentrates on price reductions with
certain assurance, however there will be
uncertainty in the lowering amount of
It focuses on the certain reduction of
emissions with little certainty with respect
to pricing-mechanisms.

emissions.
6 It is not easy to execute this tool at
international level due to WTO
agreements.
This cannot be implemented at
international level.
7 This hinders the speed of business
activities as tax regulations stunted the
economy.
This increases the speed of business by
earning gains through the trading of
carbon credits (Cui, Wei and Li, 2016).
8 This is low overhead with effective
downsizing of carbon dioxide emissions
This is high overhead with adopting a
systematic control on leakage of carbon
dioxide
9 It flourishes the use of alternative sources
of energy
It promotes the effective political
interventions at minimal rates to bring
sufficient changes (Benoit and Côté,
2015)
10 This lays an understanding for designing
environmental friendly procedures to
identify and execute it appropriately
This permits several firms to collaborate
in mutual beneficial transactions for
minimising the costs associated with
making the pollution levels in controlled
setup

Effectiveness-
Both these methods are useful in stabilizing the carbon emissions through different
platforms by augmenting the commitments and policies in proficient manner. There are major
stringent measures that laid the foundation of achieving the stability in offering the carbon
prices. Moreover, its evident that the annual greenhouse emissions have been reduced and there
will be an approximate decrease below 26-28 percent by the year 2025. Along with, there is a
flexible approach that have been used in tandem for optimization of available resources and
helping by underpinning the heat trapping emissions in efficient manner to minimise the entire
effects of it on the atmospheric layers.
These GHG emissions are the main catalyst that accelerated the use of these tools as
earlier, there were no punishment or fines that was imposed on large corporations or firms as a
whole. In the same lines, both tools support in setting a carbon pricing that build incentives to
evolve and design various energy saving technologies. This assisted in shifting the movement
towards lower carbon economy. Furthermore, both these tools have similar objective of
streamlining the sustainability component by minimising the carbon footprint. However, they
internalize the costs to bring optimal altercations at social level to correct the failures that existed
due to the failure of the marketplaces.
In addition, there is a need of proper supervision with constant verification and reporting
through maintenance of record keeping. Here, both the cap and trade along with carbon tax is in
need of identical data for enforcement of compliance of regulations, policies and rules with strict
adherence. Along with this, special provisions have been facilitated that combat the negative
Illustration 2. Environmental Regulatory Policy
Tools used by UK
(Source: CARBON TAX VS. CAP AND TRADE,
2018)

implications of the energy intensive establishments. It has reduced the use of fossil fuels that has
resulted in large transformational of wealth for decades now. However, with awareness and stark
consequences, there is a steep growth of using such adverse impacts of such disadvantaged
groups.
Along with, the revenue management have been supervised in effective manner. Here, it
is necessary to raise the revenues by rebating it directly either from customers' or using the low
carbon economy infrastructure involving the manufactures, clients and research and development
projects and more (Hu and et.al., 2015). Sometimes, both the tools are used together to enhance
the overall productivity in mitigating the methods that exponentially increase the emissions on
the earth. For proper mitigating of carbon pollution, there is a sudden need for industries to
suitably invest at affordable prices that accelerate the reductions. This help in putting a leash on
the intellectual resource to gain from the incentivize technique. Nonetheless, both these
techniques aid in harnessing the market forces by eliminating the emissions at minimal intensity
with cost effectiveness to achieve the desired outcomes.
Moreover, there is a combination of using both these tools at heightened scale in order to
regulate the pollution levels. It is important to understand the production of a hybrid model that
is related to the features of both the techniques. This tends to use the cap with an adjustable
process in which a ceiling that is refereed as carbon price floor has been used. In this, the focus is
to manage the permissible limits to cut down the greenhouse gas(GHG) emissions.

Illustration 3: Cap and Trade: The Carbon Market
(Source:Heartfield, 2015)

Shaping of energy markets
These two policy instruments have been fruitful for the United Kingdom's call for clean
energy. As per recent research, UK's rank from 20th to 7th rank out of 33 industrialised countries.
This leap of jumping of 13 places in just a span of four years is an example as one of the fastest
ascents for any country (Battini and et.al., 2018). Moreover, the usage of these two policies have
supported the benchmarking of the auditing parameters with respect to digitalization in order to
implement the regulations and policies as per various agreements and protocols like Kyoto etc.
The amalgamation of data analytics with upcoming technological advancements have formed the
connectivity in reliable and sustainable manner. These technologies led policies such as green
certificate schemes or renewable energy feed in tariffs have strongly reflected upon the relevancy
and validation of the measurement and evaluation of the emissions.
Here, there is great emphasis on the accessibility of the delivery and safety of the use of
varied energy systems at the right time and place with apt pricing strategies. Adding to the
complicated structures that have been encountered while employing these tools have often led to
challenges and obstacles. This management of tools with enforcing policies have anticipated the
emissions reductions in the required arenas. It has also raised awareness that assist in driving the
non-market barriers effectively. Such an entry of carbon pricing has helped the re-assessment of
the policy mix to align it with the designing of the objectives and goals of corporations and
organizations.
Furthermore, the combination of these tools with energy policies aid in overlapping of the
interactive framework to maintain and regulate the climate obligations with sense of
responsibility (Hintermann, Peterson and Rickels, 2015). It also shed light on the emission
performance standards which are tradable for delivering the specifications to mould the markets
of the consumption of energy resources. However, these tools have different intentions but offer
same mechanisms through investment via price floor for optimising the resources.
Impact of the management of energy resources
These tools have minimised the exploitation of efficiency of resources by targeting the
specific energy package to address the infrastructure lock-in with investment barriers to bring
stability at the energy markets. Furthermore, these reducing emissions tools would subsidize the
investments with careful planning to understand the characteristics of the current positioning of

each market area. The cap and trade program achieved the reductions over a specific period, with
subsequent lowering of cap in consequent years. Along with, it puts emphasis on the
determination of the magnitude of the incentives it has been giving to meet the future load
growth. However, if the cap do not account for the renewable sources then their effects include
low power on the overall emissions of carbon dioxide in the markets.
Additionally, these carbon taxation policies have consequences on the renewable energy
compliance markets. Such markets are becoming the hub of carbon generated marketplaces. It is
moreover understandable that the nature of the energy sector whether it is market based or
regulated or it is linked with carbon prices and its other determinants to analyse the entire
functionalities of the carbon pricing (Meub and et.al., 2016). Along with, there is a need to
comprehend that carbon tax encompasses a tax on GHG emissions with respect to each unit and
must be wise to set the limits so that the corporations do not violate the regulations or policies.
On the other hand, cap and trade system attain the cap's permissible pollution amount to
distribute the permissible limits of pollution variably and covering them either through
auctioning or trading in relation to other firms.
Consequently, the management of resources is the social obligation to fulfil the demands
of human needs by laying a consistent approachability through covering the real time challenges.
This support in overcoming the competitive advantages by critically scrutinising the prevalent
programs like carbon tax and cap and trade systems. It has allowed the methodology for
distribution of allowances to govern the embarkment of fair distribution system with credibility
and transparency (Du, Hu and Song, 2016). These tools have provided broader viewpoint on the
adjustment for reduced emissions by proposing a systematic composition in proficient manner.

Performance of European Emissions Trading System (EU ETS)
European Emissions Trading System is defined as the first trading scheme for GHG
emissions at large scale in the world. This is considered as one of the driving forces of the
European Union's climatic policy that was initiated to fight the rise of global warming. It has
three phases and out of which, currently it is undergoing the third phase. This third phase
involves the declination of the total emission at the rate of 1.74 percent on annual basis till 2020
with 2.2 percent per year till the year of 2030. In this regard, the carbon price reflects the cost of
emitting carbon dioxide to all the participants of the carbon markets (Agee and et.al., 2014).
There is also an incentive for such participants who tries to reduce their emissions until the point
from where there is no difference between buying one permit at the market price and paying the
cost of reducing emissions by one additional ton of carbon.
With reference to the same, the permit allocations assist in this embedded system by
reinforcing the feasible route in context to the carbon pricing. There is also an influence of the
carbon leakage of cap and trade programs with carbon tax that is still ambiguous. Along with, it
depends on the long terms issues that produces low emissions' generation of power in such
Illustration 4: Generation of electricity from fossil fuels,UK
(Source:Rathi, 2018)

markets. It has led to crucial pathway that emphasis on the success rate in achieving the
productivity by evaluating the integrated 3rd phase in significant and flexible manner (DeNooyer
and et.al., 2016). This endeavour has faced many hiccups yet it has seen a progressive rise to
support the landmark of these tools in tackling the climatic changes by using various market
based policies and regulations.

CONCLUSION
Illustration 5. European Emissions Trading System
(Source:How carbon credits work, 2018)

It has been summarized UK has successfully achieved their objectives in terms of energy
and climate change with their prominent efforts in committing to reach the targets with respect to
reduction of Green House Gas (GHG) emission. Furthermore, it has highlighted the features,
advantages and the overall impact of both carbon tax and cap and trade programs in effective
manner to make common man realise the significance of green initiatives. Lastly, it gave an
overview of clean technology by focusing on the reduction of greenhouse gases with succession
implementation of these regulatory tools in all around the world. However, this is relatively a
new concept but its success rate has paved the path for continuous improvements through using
funds, design of land use and forestry for better gains and many more such evaluation through
reviewing and monitoring.

REFERENCES
Books and Journals
Agee, M.D. and et.al., 2014. Non-separable pollution control: Implications for a CO2 emissions
cap and trade system. Resource and Energy Economics. 36(1). pp.64-82.
Battini, D. and et.al., 2018. Sustainability in Material Purchasing: A Multi-Objective Economic
Order Quantity Model under a Cap and Trade System.
Benoit, J.Y. and Côté, C., 2015. Essay by the Québec government on its cap-and-trade system
and the western climate initiative regional carbon market: origins, strengths and
advantages. UCLA J. Envtl. L. & Pol'y. 33. p.42.
Cui, Q., Wei, Y.M. and Li, Y., 2016. Exploring the impacts of the EU ETS emission limits on
airline performance via the Dynamic Environmental DEA approach. Applied energy. 183.
pp.984-994.
DeNooyer, T.A. and et.al., 2016. Integrating water resources and power generation: the energy–
water nexus in Illinois. Applied energy. 162. pp.363-371
Du, S., Hu, L. and Song, M., 2016. Production optimization considering environmental
performance and preference in the cap-and-trade system. Journal of Cleaner
Production. 112. pp.1600-1607.
Hintermann, B., Peterson, S. and Rickels, W., 2015. Price and Market Behavior in Phase II of
the EU ETS: A Review of the Literature. Review of Environmental Economics and
Policy. 10(1). pp.108-128.
Hu, J. and et.al., 2015. Ex-ante evaluation of EU ETS during 2013–2030: EU-internal
abatement. Energy Policy. 77. pp.152-163.
Ke, X., Lu, N. and Jin, C., 2015. Control and size energy storage systems for managing energy
imbalance of variable generation resources. IEEE Transactions on Sustainable
Energy. 6(1). pp.70-78.
Koch, N. and et.al., 2014. Causes of the EU ETS price drop: Recession, CDM, renewable
policies or a bit of everything?—New evidence. Energy Policy. 73. pp.676-685.
Meub, L. and et.al., 2016. Experimental evidence on the resilience of a cap & trade system for
land consumption in Germany. Land Use Policy. 51. pp.95-108.
Online
CARBON TAX VS. CAP AND TRADE, 2018. [Online].Available
through:<https://priceoncarbon.org/pricing-mechanisms/carbon-tax-vs-cap-trade/>.
Heartfield, K.,2015. Cap and Trade. [Online].Available
through:<https://ottawacitizen.com/news/politics/cap-and-trade-dos-and-donts>.
How carbon credits work, 2018. [Online].Available
through:<https://visual.ly/community/infographic/economy/how-carbon-credits-work>.
Rathi, A., 2018. A carbon tax killed coal in the UK. Natural gas is next. [Online].Available
through:<https://qz.com/1192753/a-carbon-tax-killed-coal-in-the-uk-natural-gas-is-next/>.

Stern,N., 2018. We must reduce greenhouse gas emissions to net zero or face more flood.
[Online].Available through:<https://www.theguardian.com/environment/2018/oct/08/we-
must-reduce-greenhouse-gas-emissions-to-net-zero-or-face-more-floods>.