Experience with Carbon Taxes and Greenhouse Gas Emissions Trading Systems

Abstract

Carbon taxes and emissions trading systems (ETSs) to limit emissions of greenhouse gases (GHGs) are becoming increasingly common. At the end of 2015, 17 GHG ETSs were operational in 55 jurisdictions while 18 jurisdictions collected a carbon tax. Empirical evidence on the performance of carbon taxes and GHG ETSs is sparse. This paper assesses the performance of those taxes and ETSs as implemented with respect to: environmental effectiveness (reduction of actual emissions), cost-effectiveness (marginal abatement cost), economic efficiency, public finance and administrative issues. Actual emissions fell for seven of 13 carbon taxes for which data are available and for at least six of ten ETSs. Taxes and ETSs in other jurisdictions may have reduced emissions from what they would have been but not enough to lower actual emissions. In at least 3 tax jurisdictions, the emission reductions appear to be due to complementary policies. Data to determine the contribution of complementary policies to the reduction of emissions covered by ETSs are not available. On average the marginal cost is substantially lower for ETSs than carbon taxes. The emissions reductions achieved by existing carbon taxes are small in most jurisdictions due to the low tax rates, the modest changes in tax rates and inelastic demands for fossil fuels. Existing taxes yield virtually no insight into the relationship between changes to the tax rate and changes to emissions. All of the ETSs have accumulated banks of surplus allowances and most have implemented measures to reduce these banks.

Keywords: greenhouse gases, carbon tax, emissions trading, effectiveness

JEL Classification: Q54, Q58, H23