Market failure, government failure and externalities in climate change mitigation: The case for a carbon tax

Abstract

This article addresses possible approaches to solving the problem of climate change by reducing greenhouse gas emissions (GHGE). It considers some of the core science on climate change, leading to a discussion of market failure, government failure and externalities. The European Union's emissions trading scheme (ETS) is cited as an example of a failure in an environment of both market failure and government failure. The discussion then focuses on carbon costing and pricing, the design features of a carbon tax and the main advantages of a carbon tax over an ETS. Copyright © 2008 John Wiley & Sons, Ltd.