Cap and Trade vs. Cap and Tax

Cap and Trade is the policy in the United States that says companies are issued a certain amount of pollution credits that let them release pollutants into the atmosphere. Examples of this program in action are NOx Budget Trading and Acid Rain programs; another example is the Clean Air Interstate Rule (epa.gov, 2010). Under Cap and Trade, companies can trade any of their unused “pollution credits” to other companies who need them, in order to legally pollute more.

Cap and Tax is similar to Cap and Trade in the fact that emissions are limited by the Government, however if a company pollutes too much, then they pay a tax on the “extra pollution”. As you can imagine, companies do not want to go over their cap, because they will pay taxes if they do. Not only are the “cap and trade” and “cap and tax” policies beneficial to the environment, but they are also good for the economy, in the eyes of the Government.

Command and Control policies can be beneficial to Cap and Trade and Cap and Tax policies because the Government can actually show companies how to lower their emissions without making the companies figure it out for themselves (agcarbonmarkets.com, 2010). The cap and trade, along with cap and tax policies, open a new market for companies to exploit, and profit from. Carbon credits can be traded like stocks, and even saved in banks, and that is just scratching the surface of the situation. Since companies can also profit from trading credits in lieu of paying taxes on them, this could be a boost to any economy. Either way, the Government is making money from it, because companies will either pay taxes on their pollutants, or they will pay taxes from the income off selling and trading their credits.

Pigovian Tax is more commonly referred to as the “sin tax”, and gives the Government the right to make money from people who do bad things, like pollute the environment. Since polluting is a crime, then the very fact that the Government makes money from it makes them an accessory. Pigovian tax is not only unethical, but it should be illegal.

When looking at Coase Theorem and how it applies to the “Cap and” policies, you have to look at how Coase Theorem is defined. A loose definition of Coase Theorem says that there are no transaction costs, or disputes over property rights no matter how the property was assigned (about.com, 2012). This applies to the “Cap” policies and is the reason why companies can sell and trade their pollution credits.

As you can see there are many benefits to the programs that tax emissions, but there are also some negativities, which include crooked governments profiting from pollution.