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Carbon Emissions: Market vs. Regulatory Approaches (Background)

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An introduction to this background page for The People Speak Global Debates Topic, 2007:

            Resolved: Market mechanisms are preferable to regulatory approaches in reducing carbon emissions.

This page is designed as an introduction and background resource for the above 2007 debate topic of The People Speak Global Debates.

Why are carbon emissions regulations schemes important, and why are we debating which ones to choose?

It is important to understand that reducing human carbon emissions is widely considered a means to solving a problem: global warming. The basic consensus is that the emission of carbon gases from the burning of fossil fuels in such things as cars and coal energy plants has the unintended consequence of warming the globe (a "negative externality"). This is because these carbon gases are greenhouse gases. Greenhouse gases let the suns rays enter the earth's atmosphere and heat the earth, and then they prevent that heat from being released back into space. This is similar to how a greenhouse works, where a building or room has a glass ceiling, lets sunlight in, but then prevents the heat from escaping, thus heating the room. The theory is that by decreasing the human emissions of carbon gases (and other greenhouse gases) into the atmosphere, this greenhouse effect will be reduced and the earth will be cooled down. The question becomes, which schemes for reducing carbon emissions are best? This is important primarily because countries and international bodies need to prioritize the focus of their attention and money. There are many different approaches: setting emissions limits or standards, levying a tax on carbon emissions (carbon tax), or capping emissions and establishing a trading system in what are known as carbon credits (cap-and-trade). There is much debate as to which one of these programs is best. Debatepedia features two in particular:

  1. Carbon Emissions: Market vs. Regulatory Approaches (arguments) - Are market mechanisms (including a carbon tax and cap-and-trade system) better than carbon emissions regulations and standards?
  2. Carbon Emissions: Cap-and-trade versus Carbon Tax (arguments) - Is a cap-and-trade system better than a carbon tax?

How are we defining "market" and "regulatory" mechanisms? Keep a couple of things in mind when reading these debates. Both cap-and-trade and carbon tax solutions to carbon emissions are considered "market mechanisms". A cap-and-trade system actually creates an "emissions trading" market. A carbon tax is considered a "market" mechanism because it adds a cost to polluting with the goal of giving companies and others an incentive to burn fewer fossil fuels. Emissions standards are considered regulatory or command-and-control mechanisms because they do not attempt to create incentives for change within the market, but rather simply obligate companies and others to emit fewer carbon gases.

Do we have to make a choice between these three options? Not necessarily. Many groups actually advocate implementing all of the above systems for cutting carbon emissions. These approaches are not necessarily mutually exclusive. Nevertheless, from a policy standpoint, countries and international bodies often desire to determine which approach is best so that they can prioritize which policy option they should choose. For these reasons, the outcome of these debates will have a significant impact on how carbon emissions policies are shaped globally.

Cap-and-trade (markets)Carbon Tax (markets) Emissions regulations

Introductions to market and regulatory mechanisms for reducing carbon emissions

Cap-and-Trade (market approach #1):

One "market" approach to reducing carbon emissions globally is a cap-and-trade or emissions trading system. In a cap-and-trade system, a central authority (usually a government agency) sets a limit or "cap" on the carbon emissions of a region as well as individual companies. Companies are given credits or allowances which represent the right to emit up to their designated "cap". Companies that pollute above their "cap" must buy more credits from companies that pollute less than their particular "cap". In this way, a cap-and-trade system effectively punishes "inefficient" producers and rewards "efficient" producers. This creates an incentive for companies to become more efficient and cut their carbon emissions.

Carbon Tax (market approach #2):

The second "market" approach under consideration globally is a carbon tax. A carbon tax is a tax on carbon emissions. This makes it more expensive for companies as well as consumers to pollute. By doing so, a carbon tax creates an incentive for the "market" to produce and consume fewer fossil fuels and emit less carbon into the atmosphere.

Emissions regulations

Emissions regulations and standards "are requirements that set specific limits to the amount of pollutants that can be released into the environment. Many emission standards focus on regulating pollutants released by automobiles (motor cars) and other powered vehicles but they can also regulate emissions from industry, power plants, small equipment such as lawn mowers and diesel generators." They are mandated from a government, and do not utilize market forces, as do carbon taxes and cap-and-trade approaches.

Wikipedia articles on market and regulatory approaches to reducing carbon emissions

Cap-and-trade articles (Wikipedia):

Carbon tax articles (Wikipedia):

Carbon regulations and standards articles (Wikipedia):

Other good online background resources on cap-and-trade, carbon tax, emissions standards approaches

Cap-and-trade background resources:

Carbon tax background resources:

Carbon regulations background resource

Past and existing market and regulatory systems for controlling carbon emissions

Cap-and-trade systems (market-based)

Carbon tax systems (market-based)

  • Sweden enacted a carbon tax on January 1, 1991.[1]
  • Finland, the Netherlands, and Norway also introduced carbon taxes in the 1990s.[2]
  • Japan: passed legislation in 2005 for a carbon tax to take effect in 2007.[3]
  • Canada: implemented its first carbon tax in 2007 in Quebec.[4]
  • New Zealand: "New Zealand first to levy carbon tax", May 5, 2005
  • Australia has been looking at implementing a carbon tax.[5]

Emissions standards systems (regulations)

Refer back to Wikipedia's Emissions standards article to get a good overview of the different systems globally.

Background resources on global warming and carbon emissions policies:

Understanding the problem of carbon emissions and global warming

Important reports:

From Wikipedia:

Understanding carbon emissions politics and broader policies

From Wikipedia:

Main pages for the 2007 Global Debates

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