【Carbon Neutrality】A Comparative Study on Carbon Trade and Carbon Taxation

As a speaker and participant at the “Policy Dialogue for Climate Action” in 2019, I remember that one of the politicians from the Legislative Yuan proposed the concept of collecting carbon taxation. He claimed, “ The business companies should be responsible for all carbon emission. The more carbon they produce, the more taxation there should be.” 

2019.11.29 Policy Dialogue for Climate Action in Taipei

Without relevant background knowledge then, I thought as long as it is properly imposed, it’s a perfect way to internalize the negativity created by those companies. However, after I made a comparative study on  “carbon taxation” and “carbon trading”, which are the policies complementing each other, I not only realized carbon taxation is not the only solution, but also its advantages and disadvantages. 

To begin with, the efficiency of a carbon tax may be relatively high. Compared with carbon trading operated by a free market, the price of carbon tax will not result in drastic fluctuations. Next, the government can receive revenue from carbon tax, and invest in green infrastructures or energy transitions that are also effective to tackle carbon dioxide. Yet, as the upper limit of carbon emissions cannot be limited with taxation, the environmental effectiveness could be low. Some lucrative industries are willing to pay the taxation, rather than reducing carbon emission which will decrease their profits. 

To avoid huge fluctuations of carbon prices, Harald Winkler and Andrew Marquard proposed a method of linking carbon tax rates with the amount of emissions, using one or two years as the adjustment cycle for tax rate. When emissions are higher than the target, the government will increase the tax rate; when the emissions are lower than the target, the government will lower the tax rate.

Compared with a carbon tax, carbon trading is superior on environmental efficiency. Carbon trading has a fixed quota of emission at the beginning of its implementation. By issuing tradable licenses, it limits the amount of carbon that can be used in the entire market. However, although the prospects for environmental benefits are promising, it is still difficult to predict price trends and avoid large market fluctuations because of the free market economy and environmental changes. With the intention to stabilize the carbon market, the IMF has also put forward the concept of a "safety valve", which aims to set the upper and lower limits of the carbon price, and allow lending and storage.