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Carbon Emissions: Market vs. Regulatory Approaches (arguments)

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Proposition [Pros]Opposition [Cons]

Reducing emissions - Do market approaches have greater potential to reduce carbon emission than regulatory approaches?


A cap-and-trade system better encourages companies to cut their carbon emissions: A cap-and-trade system provides companies with credits if they are able to reduce their emissions below an established level. They can then sell these credits for a profit. So, if a company takes action to reduce its carbon emissions below the designated level, it can make a profit. This is a powerful market incentive that is more likely to cause companies to invest money in finding the best ways to reduce their carbon emissions as much as possible. A regulatory approach lacks this important profit motive, which makes it less likely that companies will invest in finding the best ways to lower carbon emissions. Also, with regulations, if a company meets the mandated standards and regulations, it has no incentive to further reduce its carbon emissions, while in a cap-and-trade system the company would have this incentive.

A carbon tax market mechanisms would be more effective in reducing carbon emissions: The theory behind carbon taxes is that it would cause higher energy prices, which would cause less consumption and emissions as well as providing incentives for greater fuel efficiency. Other reasons include:

  1. A tax takes effect faster: A tax becomes effective on a chosen date. Emissions standards, on the other hand, are unveiled slowly over the time period it takes for a new car fleet to enter the market.
  2. A gas tax applies to all consumers of gasoline, while emissions standards apply only to those in the newer car market.
  3. While a carbon tax may cause consumers to consume or drive less, emissions standards may actually encourage additional driving because drivers can drive longer distances for less money. This would not have the effect of reducing carbon emissions.


Carbon emissions regulations and standards are effective: It is unnecessary to attempt to implement market measures for cutting carbon emissions, when carbon regulation standards are effective and already in place. If carbon emissions need to be reduced even further, it is possible to simply strengthen existing standards. Why introduce an entirely new market-based system when it's not necessary to achieve the same result of cutting carbon emissions?

Command-and-control regulations do create costs that incentivize reductions in carbon emissions: With CAFE standards in the United States, for example, substantial fines were established for car manufacturers that produced inefficient cars. In 2005, Cars had to be able to travel 27.5 miles per gallon (mpg), and light trucks had to be able to drive 20.7. Companies were fined $5 for each 0.1 mpg over fleet-limit for each car sold. So, if a company sold 2 million cars that averaged 0.5 mpg over the standard, it would be fined $50 million.[1] Obviously, this created a good cost-based incentive for car-manufacturers to produce more efficient cars that emit fewer carbon gases. So standards set costs and create incentives for change just like so-called "market-mechanisms".

A carbon tax will not cause drivers to consume less energy. A carbon tax will not effect decisions such as driving to work every day. People will still have to do this, and assuming they own the same car, they will continue burning as much fossil fuels and emitting the same amount of carbon dioxide into the atmosphere. A carbon efficiency standard, on the other hand, would force efficiencies on cars.

Standards target and limit the worst kinds of emissions: Exhaust and other emissions are much less harmful today than they were a decade ago, thanks to emission standards. Standards set specific regulations on the kinds of emissions that are allowable. They can be used to target and limit the kinds of emissions that contribute more than others to global warming. Standards do a better job of differentiating between different "bad" pollutants than carbon market mechanisms.

Standards require old generating plants to update equipment: Market mechanisms do not explicitly require that firms update their equipment.

Economics - Would market mechanisms be better for the economy than regulatory measures?


Emissions markets are more economical. Many studies have found that emissions markets cost an economy less than regulatory approaches.

A carbon tax is more economical: Numerous studies indicate that a carbon tax could achieve the same reductions in carbon emissions as emissions standards, but at a lower overall cost to the economy.


Emissions standards are more stable than the carbon markets: Emissions trading markets can be unpredictable, as with any market. Companies don't like this instability. Stability allows a company to be confident that they can profit from their investment decisions. Such stability may even be important in ensuring that a company is willing to invest in more efficient technologies that emit less carbon.

Fairness - Are market mechanisms more fair?


It is fair to punish all carbon emissions with a carbon tax: Emitting carbon dioxide and other fossil fuel pollutants into the atmosphere is always bad because it is the cause of a global crisis called Global Warming. Therefore, it is always fair to punish this activity through a "carbon tax". If we do not punish people today, than our children will be punished with the consequence of global climate change.

Emissions standards can give unfair advantages to industries: Emissions standards may favor one element of an energy industry over another by limiting the use of certain technologies and fuels over others.


Taxes unfairly punish innocent consumers of energy: Many people have no choice but to consume energy, such as when they drive to work. A carbon tax will punish them for this activity, but these people have not choice. This is unfair.

Emissions markets allow companies to buy the right to commit a social "bad" (polluting): Isn't all pollution "bad", particularly in the context of global warming? If so, it is wrong that a emissions trading system gives companies the ability to "buy" the right to pollute. Governments should not be in the business of creating markets for companies and others to lawfully commit social "bads" (polluting).

Feasibility - Are market mechanisms easier to implement than regulatory approaches? Are they less of an administrative burden?


Emissions regulations and standards are a greater administrative burden: In general, regulations and standards require a greater degree of government monitoring and enforcement. Due to the number of entities that must be regulated, the many different kinds of standards and regulatory frameworks that are often put in place, and the consistency demanded across these programs, a regulations and standards system is likely to be a greater administrative burden. This burden will be both in time and money.

Firms often calculate that non-compliance with regulations is more cost-effective: The cost of compliance may exceed the cost of penalties for noncompliance[2]:

  • Monitoring isn’t perfect, so companies can get away with not complying with the laws.
  • Penalties are not large, so even if a company is caught breaking the laws, they are not punished severely.
This often leads companies to calculate that they should simply not comply with standards. In this way, standards may be ineffective.


Efficiency standards are more popular than market approaches.

Companies can easily adapt to heavier efficiency standards: Some argue that carbon emissions can be reduced through more stringent emissions standards. Are these companies able to become more efficient? Yes, and at little cost.

A carbon tax is less popular and harder to achieve politically: The basic problem here is that a carbon tax would be a new tax on the public. New taxes are typically unpopular, making this policy option less politically realistic.

A cap-and-trade system is complicated and entails substantial administrative costs. The costs of establishing and administering a cap-and-trade system could be substantial. It demands that a cap be set and enforced. The allocation of carbon credits is also highly complicated and demanding of administrative oversight.

A carbon market is complicated to explain and introduce into a population: University of California Berkley Political Science Slide Show - "Artificial markets are complicated ideas. Teaching people about them is difficult. Persuading people to trust the markets is difficult. Trust is required from both sides."

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