Comparative Study Of Carbon Tax And Carbon Trading Mechanism

Facing the threat of global warming, many countries take action and use environmental policy to reduce greenhouse gas emissions. In contrast to command-and-control regulations, market-based environmental instruments has many advantages. Market-based environmental policies, which rely on economic incentives as the primary means to achieve environmental goals, have become increasingly popular since the1980s. Among these instruments, the use of carbon taxes and carbon trading mechanisms is particularly compelling. However, the use of carbon taxes and carbon trading mechanisms for the control of greenhouse gas emissions are faced with many uncertain factors, and policy environment in each country are not the same. Therefore, Researching the comparative advantages of these two tools and determine the conditions under the conditions of uncertainty is important for policy-making authorities to make the best decisions to achieve the maximization of social welfare. This paper conducted a study on this issue.Begining with uncertainty theory, this paper generalizes the connotation and extension of the uncertainty, and then analysis the characteristics of greenhouse gas pollution by refering previous studies, point out all kinds of uncertainties factors when we use the market instruments to control greenhouse gas emissions,and analyzes of the impact of uncertainty on decision-making.Secondly, the paper outlines the process and general conclusion of researching tool selection between carbon trading mechanisms,then point out the general conclusion ignores the existence of uncertainty reduction and revenue benefits and abatement costs of emission reduction correlated. As a starting point with Weitzman’s view, this paper use comparative static analysis to find the condition which the carbon tax or carbon trading mechanisms have relative advantage. This paper uncover three important principles governing the choice of carbon tax relative to carbon trading mechanisms, the first is the correlation coefficient between benefits and costs; the second is the relative slopes of marginal costs and benefits, the last is the benefit-cost uncertainty.Again, using a time dynamic model that incorporates costs and benefits,stock decay time discounting and uncertainty,this paper uncover that the comparative advantage of carbon tax or carbon trading mechanisms depends on the slope of marginal cost and marginal benifits, the time discount rate and the absorption of greenhouse gases. With the steeper the slope of marginal benefit, the flatter the slope of marginal cost, the smaller the discount rate, the larger natural absorption rate and a negative correlation between the costs and benefits, the carbon tax become more efficient. Vice versa the carbon trading mechanism become more efficient.Finally, this paper overview the development of carbon taxes and carbon trading mechanism in China, then pointed out the basic work before using these two tools. Considering the the marginal abatement costs, the policy costs, the combination of subsidy mechanism and the fair and equitable of society, this paper deem that the carbon tax is more suitable as a market-based instruments for China’s greenhouse gas abatement.