Cap and Trade vs. Carbon Tax

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Some proponents of climate change legislation support cap and trade, while others support a tax on carbon.

What's the difference?

Cap and trade:

• There would be a cap on the total amount of greenhouse gases that could be emitted nationwide by industry.
• This cap would be reduced over time.
• Market mechanisms would determine how these reductions are made and what emitters of these gases would pay for their emissions.

Carbon tax:

• Congress would determine what emitters of greenhouse gases would pay for their emissions.

PNM supports cap and trade

We believe cap and trade is a better approach for several reasons:

• Cap and trade provides the greatest certainty for reducing greenhouse gas emissions.
  • Under cap and trade, overall emissions of greenhouse gases would be capped, with the amount allowed to be emitted reduced over time as technology allows for greater reductions.
  • A carbon tax does not provide this environmental certainty.
  
  
• Cap and trade is more responsive to economic conditions.
  • Because cap and trade is a market-based system, the price to emit greenhouse gases would change based on the state of the economy, rising higher during times of economic growth and dropping during times of economic slowdown.
  • This dynamic price is very different than a carbon tax, which could only be changed by an act of Congress.


• History shows cap and trade can work.
  • The Clean Air Act Amendments of 1990 established a cap-and-trade system for sulfur dioxide, the major precursor of acid rain.
  • As a result of this program, long-term reduction targets were achieved three years ahead of schedule and at a cost significantly lower than expected.
  • When the legislation was passed, the EPA estimated the program would cost $6 billion annually once fully implemented.
  • The Office of Management and Budget estimates actual costs to be between $1.1 and $1.8 billion, less than 30 percent of the original forecast.


• Cap and trade isn't necessarily any more complex for businesses to administer than a carbon tax.
  • The U.S. tax code, running to the thousands of pages, is extraordinarily complex.
  • On the issue of carbon tax vs. cap and trade, the Pew Center on Climate Change says:
    • "A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay. Under a cap-and-trade system, borrowing, banking and extended compliance periods allow firms the flexibility to make compliance planning decisions on a multi-year basis."


• Revenues generated by taxes aren't guaranteed to promote clean and green technologies.
  • They go into the U.S. Treasury, where they sit until Congress appropriates monies for programs that range from reducing the deficit, paying for health care or reducing other kinds of taxes.