Cap and Trade is Bad for the Economy: ACI Study Showed That a Simple Carbon Tax Would Outperform a Cap and Trade System — Study by Commerce Undersecretary for Former President Bill Clinton

 Addressing the Risks of Climate Change:

The Environmental Effectiveness and Economic Efficiency of Emissions Caps and Tradable Permits, Compared to Carbon Taxes



An ACI study sponsored in February 2007 and authored by esteemed national economist and former Undersecretary of Commerce Dr. Robert Shapiro found that carbon taxes are a better alternative to emissions caps and tradable permits (commonly referred to as cap-and-trade).  After more than two years have passed, the study remains unrefuted and calls into question why are we moving toward a costly cap and trade policy, particularly as the economy is struggling.


In examining the effectiveness and administrative challenges between carbon taxes and cap-and-trade strategies, Dr. Shapiro’s study found that carbon taxes are a more effective way to lower emissions than cap-and-trade schemes, because they force businesses and industries to make the right choice between: 1) reducing carbon consumption and increase energy efficiency; or 2) paying increasingly higher energy costs.  That choice provides the right incentives for countries and companies to reduce CO2 emissions. 



Shortcomings of Cap-and-Trade Schemes

While ACI does not support either approach, the study calls into question the imposition of a cap and trade scheme.  Although both policy proposals would result in significantly higher prices for fossil fuels, unlike cap-and-trade schemes, carbon taxes cannot be manipulated by the markets and would offer the most stable, as well as transparent, system for consumers and industry alike.  A cap-and-trade scheme also would create much more volatility in energy and energy-related prices, as well as increase administrative complexity and the prospects for blatant corruption.  The ineffectiveness of the cap-and-trade system is exemplified by the European Emissions Trading Scheme (ETS), where European CO2 emissions actually increased in 2005, and the European Environmental Agency has projected that the EU is likely to achieve no more than one-quarter of its Kyoto-targeted reductions by 2012.  In addition, much of the European “reductions” simply reflect credits purchased from Russia or non-Annex-I countries, with no net environmental benefits.



Considerations for Carbon Taxes

Carbon taxes would increase energy prices and do so in a manner that is fair, transparent and non-volatile.  Carbon taxes would also provide businesses and industries with incentives to invest in more efficient technologies that actually reduce CO2 output and achieve the policy objective of lowering emissions.  

  • Carbon taxes directly raise the price of carbon-based energy, imposing the greatest costs on those firms and economies that produce the most emissions.  In this way, they have direct incentives to reduce their energy emissions and substitute to cleaner forms of energy, until the cost of doing so is greater than the tax. 
  • Carbon taxes would avoid the price volatility and administrative problems associated with cap and trade, as well as improve economic efficiency.  In raising the price of carbon-intensive products, carbon taxes would make alternative energy sources more price competitive. 
  • Carbon taxes would offer a more effective way to reduce Greenhouse Gas Emissions (GHG) and provide more powerful incentives for the development of new, climate friendly technologies. 
  • While the poorest-nations could still be exempt, carbon taxes would bring many of the developing countries into the project. 



Cap and Trade is Bad Economic Policy

While both carbon taxes and cap-and-trade schemes would raise energy prices for American Consumers, and ACI does not endorse either approach,  carbon taxes can be a more effective means to reduce carbon emissions than cap-and-trade.  Carbon taxes would also produce less price volatility than the alternative, because carbon taxes raise the costs of energy by the same amount regardless of how fast company or country emissions grow.  As another benefit, the resulting predictable cost of a carbon tax also simplifies government and business decisions about the investments and the steps that they can take to reduce emissions.  While discouraging corruption and reducing the administrative challenges associated with cap-and-trade schemes, a carbon tax is fair and may encourage fully international participation.   


For a copy of Dr. Shapiro’s report “Addressing the Risks of Climate Change: The Environmental Effectiveness and Economic Efficiency of Carbon Taxes, Compared to Emissions Caps and Tradable Permits,” visit 









American Consumers Institute

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2 thoughts on “Cap and Trade is Bad for the Economy: ACI Study Showed That a Simple Carbon Tax Would Outperform a Cap and Trade System — Study by Commerce Undersecretary for Former President Bill Clinton

  1. “The Dilemma of Carbon Tax Trading in ASEAN region”

    There is no reliable data that carbon taxes could actually generate eco-businesses in ASEAN region. There are insufficient fundings for any wistful ventures in carbon taxes market. Investment in eco-technologies is like investing in biotechnologies. You don’t get to see instant results.

    That is not the only problem. Most governments’ current eco-blueprints in ASEAN region are no way near the mark of sustainability performance due to competing policy interests between different Ministries within the respective countries.

    The Kyoto Protocol’s timeframe in GHG performance is just unattainable even for developed countries like G-8. If developed countries as a bloc like G-8 are not able to achieve the targeted objectives within the specific time-frame, there is no way to expect developing countries in ASEAN region to leap-frog over G-8 countries in the carbon reduction performance.

    I also doubt if carbon taxes would be a good alternative to stimulate carbon trading in ASEAN countries. Even in Singapore, Thailand and Malaysia, carbon tax trading is still pretty much ‘a new kid on the block’ that requires market re-orientation in the neighborhood for the next decade or so.

    Until there is concrete data/studies to show a real relationship between carbon taxes and an efficient economy that contributed to reduced Greenhouse Gas Emissions (GHG), carbon tax trading will remain a forgotten tax novelty in the environmental matrix equation.

    Jeong Chun Phuoc
    [email protected]

  2. ” Malaysia must take initiative to re-define Climate Change Roadmap at the upcoming Copenhagen Conference Dec. 2009″
    12th Oct. 2009

    The article “Dark Cloud over Climate Talks” by martin Khor (The Star, 12.10.2009) painted a rather dark pessimistic color to the mood at the recently concluded Climate talks in Bangkok, Thailand.

    Developed nations perceived abandonment of their current commitment under Phase One of the Kyoto Protocol (KP) is a clear indication that there is a need for a more conducive approach in addressing climate change specifically relating to greenhouse gas emissions(GGE) dilemma.

    This perception must not be viewed with pessimism or seen as a negative change of attitude by developed countries. Developing countries are also part of the problematic GGE equation apart from the Kyoto Protocol’s perceived rigid implementation platform.

    There is no denying that the Kyoto Protocol imposed binding obligations upon developed bloc. However, corresponding non-commitment/inactions by developing countries are also a collective issue.

    All signatories to the KP must therefore take the cue that if co-operation cannot be effected under the current KP, there is an urgent need to modify the ‘mitigation commitments’ by developed countries vis-vis the ‘mitigation actions’ on the part of developing countries. Such modification can be perceived as fair as it takes into view national interests and acceptable GGE achievement.

    What is of crucial importance is the underlying commitment by all members towards total, if not gradual reduction, of GGE emissions on a global scale so that 2nd Phase of the KP can be initiated without major glitch in 2013.

    Malaysia as a developing country, having achieved several milestones in its effort to implement GGE objectives, must therefore take the initiative to promote, re-ignite and re-define those ‘commitments’ in a form that are mutually acceptable to both developed and developing countries within the KP framework which is in fact, open to international modification and national interests alignment.

    Jeong Chun Phuoc
    [email protected]

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