Emission trading or proportional carbon tax: a quest for more efficacious emission control

Abstract

Two alternative procedures currently exist for efficient carbon dioxide (CO2) emissions control: carbon emission trading and proportional carbon tax. This article explores which of the two is more desirable and efficacious. Compared to emission trading, the equilibrium under a universal proportional carbon tax achieves Pareto superior allocation. In addition, the price of a unit of CO2 emissions is much higher in the case of a universal proportional carbon tax than for bilateral emissions trading. This paper reveals the superiority of a universal proportional carbon tax over the emissions trading in terms of the efficiency of CO2 emissions control. However, deciding and abiding by a universal tax rate is likely to require great political will. In this sense, viewed in the current context, such a tax scheme is visionary. Gradualism is unavoidable. It is far more desirable to expand the network of the upcoming trilateral carbon trading network steadily rather than leaving the global economy to the laissez-faire situation.