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Yale Environment 360: Putting a Price on Carbon: An Emissions Cap or A Tax?

Authors: Frances Beinecke, Jeffrey D. Sachs, Fred Krupp, Roger A. Pielke Jr., Fellow, Cooperative Institute for Research in the Environmental Sciences, University of Colorado, Robert N. Stavins, Charles Komanoff, Eileen B. Claussen, and Baruch Fischhoff
May 7, 2009

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The days of freely dumping greenhouse gases into the atmosphere are coming to an end, but how best to price carbon emissions remains in dispute. As the U.S. Congress debates the issue, Yale Environment 360 asked eight experts to discuss the merits of a cap-and-trade system versus a carbon tax.

A broad spectrum of people concerned about global warming and U.S. energy independence agree on one basic truth: Sooner or later, emitting planet-warming greenhouse gases is no longer going to be free. Whether it comes this year, or next, or in five years' time, legislation imposing a price on burning fossil fuels seems all but inevitable.

Any law that places a price on carbon must achieve two basic and interrelated goals: discouraging - with increasingly painful economic consequences - the use of oil, coal, and natural gas, and encouraging the development of renewable sources of energy. Two paths to this end have been proposed. The first is a cap-and-trade system, which would place progressively stricter limits on fossil fuel use; require power plants, industries, and other major sources of greenhouse gases, to purchase permits to discharge carbon dioxide; and establish a market in those permits. The second is an outright tax on fossil fuels. Proponents of both methods say the economic hardship created by higher energy prices could be offset by rebates to taxpayers.

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