Rationale and Impact of a Carbon Tax

14th July, 2010

Over 50 participants attended this event exploring the impact of implementing a carbon tax vs. a cap-and-trade scheme in China for reducing carbon emissions. Featured speakers were Professor Pan Jiahua, Director General of the Institute of Urban and Environmental Studies at the Chinese Academy of Social Sciences; Mr. Frank Joshua, CEO of China Carbon Corporation; and Mr. Mei Dewen, General Manager of CBEEX.

Prof. Pan Jiahua outlined the differences in adopting a a carbon tax solution versus a cap-and-trade scheme versus. The former would influence the price of carbon, but would not directly influence quantity, whereas the latter would define a specific volume reduction and leave the price largely to the market. Both methods beg the difficult questions of would be an appropriate price, in the case of a carbon tax, or volume, in the case of a cap-and-trade scheme. Prof. Pan also described the energy challenges that China faces, including the economy’s current reliance on coal, and it is clear that for development to be sustainable, the Chinese must transform, though the central question remains of what speed of transformation would be appropriate. Given these challenges, Prof. Pan concluded that a carbon tax can be a tool in addressing present problems, but will require careful sequencing and adaptation.

Mr. Frank Joshua also agreed with the conclusion that a transformation is needed and touched on how both a carbon tax and cap-and-trade scheme can do part of the job. While both are potentially economically efficient, perhaps the market approach of cap-and-trade adds the advantage of effectuating improvement at least cost. However, while market mechanisms (e.g. cap-and-trade) can solve the quantity problem, there are other associated aspects that cannot be addressed with cap-and trade, e.g. market size. When difficulties in market size arise, a carbon tax or regulatory approach might be the better choice.

Mr. Mei Dewen addressed the possible variations of a carbon tax, a market approach (namely cap-and-trade), or a combination of both. He called attention to two types of costs involved with both market and regulatory solutions: information costs and implementation costs (e.g. a carbon market would have a cheaper information cost, but a higher implementation cost). Mr. Mei emphasized the benefits of market approaches and vouches for their inclusion in seeking solutions to environmental problems.

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