Lawmakers face two basic options for climate policy: a federal carbon tax, or a U.S. cap-and-trade system. Both policies have a similar goal of cutting greenhouse gas emissions. However, cap and trade is often viewed as more politically attractive because of lawmakers' unwillingness to be associated with explicit tax increases. A cap-and-trade system offers lawmakers a way to curb greenhouse gas emissions through regulations rather than tax increases—a less visible approach that enjoys the popular perception of being less burdensome to households.
Contrary to this perception, economic theory teaches that cap and trade and carbon taxes impose nearly identical economic burdens on households. Both policies increase consumer prices for carbon-intensive products and lower real household income in an economically equivalent way. The popular view that cap and trade offers a "tax free" way to address climate change is therefore based on a misconception of how the economic burdens of climate policy-both cap and trade and carbon taxes-will ultimately be borne by American households.
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