Navigating Carbon Pricing Policies. Assessing the Efficacy and Practicality of Carbon Tax and Emission Trading Schemes for Climate Change Mitigation

Essay from the year 2022 in the subject Business economics - Accounting and Taxes, grade: 97, Free University of Berlin (Business Administration and Management), course: Business Management, Marketing, language: English, abstract: Carbon pricing, encompassing carbon tax (CAT) and emission trading schemes (ETS), stands at the forefront of climate change mitigation policies. This paper critically examines the effectiveness and practicality of these policies, particularly in reducing carbon emissions. Drawing from existing literature, it argues that carbon tax offers significant advantages over ETS in terms of practical implementation, environmental impact, and economic efficiency. However, it acknowledges the complexities and challenges associated with both approaches. One key aspect analyzed is the certainty regarding cost and benefits of abating carbon emissions. Carbon tax provides a relatively stable pricing mechanism, simplifying cost determination, while ETS offers more certainty about emission reductions and associated benefits. The paper discusses the trade-offs between these two approaches based on the shape of marginal cost and benefit functions, as proposed by Weitzman (1974). Revenue generation and utilization are also examined, revealing that carbon taxes tend to raise more revenue compared to ETS due to differences in pricing mechanisms. Effective utilization of these revenues is crucial for economic efficiency and addressing distributional concerns. Additionally, administrative requirements and political factors influencing policy adoption and design are discussed. The paper also evaluates China's carbon pricing landscape in China, highlighting the challenges faced by its ETS program and proposing a hybrid approach incorporating carbon taxes. Such a hybrid system aims to address administrative burdens while ensuring broader coverage of carbon pricing across sectors and industries. In conclusion, while both carbon tax and ETS have their merits, carbon tax emerges as a more practical and effective option. However, the paper suggests that a hybrid approach, tailored to specific contexts like China, could offer a viable solution to carbon emission reduction challenges. Overall, the paper contributes to the ongoing discourse on carbon pricing policies and their implications for climate change mitigation efforts.