Exxon is right: Let us re-examine our choice for a cap-and-trade system over a carbon tax

This commentary examines the impact of the recently launched European Union Emission Trading System (EU ETS) in terms of emission reductions and cost to the public. The study points out that a cap-and-trade system may not be the most cost-efficient mechanism to reduce greenhouse gas emissions. It also lists seven main differences between such a system and a carbon tax along the following issues: amount of emissions reduced; flow of revenue to the public purse; cost of the system to the public; marginal cost of carbon emission reductions to the firm; generating excess rent; price setting mechanism and stability of system; as well as duration and commitment. When looking at emission reductions along these dimensions, it becomes clear that an internationally coordinated carbon tax may be a quicker and cheaper way to reduce greenhouse gas emissions worldwide.