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1.     Introduction
Today, major/global climate change
conversations are no longer centered on the validity or otherwise of global
warming as a major threat and challenge to the earth’s existence. The doubts
that once welcomed this subject “are fading, appropriately, as rapidly as some
ice sheets and glaciers are melting.”[1] 


The United States Department of State states that,
“climate change poses multiple threats to U.S. and global security. It is
likely to exacerbate economic and social inequality, and increase competition
and conflict over agricultural, marine, and water resources. It can result in
the massive displacement of people, including those whose livelihoods depend on
these resources.”[2] The discussion today, both locally and
internationally, focus on ways to abate the continued deterioration of our
climate thereby enhancing our collective survival. The purpose of this paper is
to discuss two major legal climate change strategies, comparing and contrasting
both, and highlight their advantages and disadvantages The two strategies
examined in this paper are Cap-and-Trade and Carbon Tax. “Climate change
strategies” is used here to mean plans or methods employed to reduce the
emissions of Greenhouse Gases (“GHGs”). The following are the critical GHGs
found on earth’s atmosphere: Water vapor (H2O), Carbon dioxide (CO2), Methane
(CH4), Nitrous oxide (N2O), Ozone (O3), Chlorofluorocarbons (CFCs).[3]
2.       Comparative
Analysis of Cap-and-Trade and Carbon Tax as Legal Climate Change Strategies
2.1.  Cap-and-Trade
Cap and Trade are two words which when
taken together represent a legal method of tackling the destructive effects of
climate change by reducing the emissions of GHGs. “[A regulator] sets a [] ‘cap’ [] on emissions, which is lowered over time to reduce the amount of
pollutants (e.g., CO2) released into the atmosphere. The ‘trade’ creates a
market for carbon allowances, since the ‘total number of permits is limited by
the cap, the permits take on financial value and can be traded on the open
market,’[4] persuading companies to innovate in order to meet,
or come in under, their allocated limit. The less they emit, the less they pay,
so it is in their economic incentive to pollute less.”[5]
A very successful example of a
cap-and-trade legal strategy is the Acid Rain Program (the “Program”).
Established by Title IV of the 1990 Clean Air Act with U.S. Environmental
Protection Agency (“EPA”) as its administrator. The major goal of the Program
is to reduce Sulfur Dioxide (“SO2”) emissions to half of the level in 1980 by
setting a cap on the total amount of SO2 that could be emitted by electric
power plants across the country. It is believed that the Program have reduced
annual SO2 emissions to one-half the amount emitted in 1980.[6]
How it works(ed)? As a typical cap-and-trade
program, the Program did not set individual emission caps for each powerplant,
rather, an overall cap is set each year with each powerplant allocated a
certain number of allowances based on the predetermined cap. An allowance is a
right to pollute, to the extend ‘allowed.’ When not fully exhausted or used, by
reducing emissions below the allowed level, an allowance holder may sell
(trade) or save (bank) the allowance for future use. To be complaint,
powerplants that are unable to reduce their emissions below the allowed level
must purchase allowances. The trading aspect therefore creates an incentive for
emission reduction. The overall allowances are adjusted and lowered over time
to ensure continued reduction in emissions and achievement of the program’s
goal. How are emissions monitored? Every powerplant under the Program is
required to deploy a Continuous Emissions Monitoring (CEM) which continuously
measure the emissions of SO2, reporting emissions to the EPA. Under
cap-and-trade strategy, some of the major policy issues are what to regulate
and the scope (which GHGs and emissions sources to include and where in the
fossil fuel supply chain the point of regulation will occur), method of
allowance distribution (free distribution, auction or a synergy of both?), and
flexibility and cost controls (bankability, safety valve, offsets e.t.c.).

2.2.  Carbon Tax
By contrast, a carbon tax is a tax levied
on the carbon content of fuels.[7] “It is intended to make users of fossil fuels pay
for climate damage their fuel use imposes by releasing [GHGs, chiefly] carbon
dioxide into the atmosphere, and also to motivate switches to cleaner energy.”[8] Like the traditional command and control regime,
carbon tax tries to internalize the social cost of the utilization of dirty
fuels. Emissions of GHGs, specifically CO2 is proportionate to the carbon
content of the fossil fuel burned for the generation of energy, making the
implementation of a tax regime on the carbon content of the fossil fuel ease.[9] Due to this certainty, a carbon tax could be
implemented at the point of the entry of the dirty fuels into the market
(Upstream), passed along through the wholesale users (downstream) to the final
consumer of products in rates. An example of a successful carbon tax program is
that of Sweden. Sweden has used a carbon tax to reduce greenhouse gas emissions
since 1991. “The Swedish Ministry of Environment estimated that carbon tax has
cut emissions by an additional 20 percent (as opposed to solely relying on
regulations), enabling the country to achieve its 2012 target under the Kyoto
Protocol.”[10]
Why Carbon tax? It is direct and it can be
used to generate revenues for the government, which applies it for a more
economic purpose. “It could be revenue-neutral: all revenues could be rebated
directly to every citizen (tax-and-dividend) or could be used to reduce
existing taxes (tax-and-shift). Alternatively, revenues could be invested in
development and deployment of new clean-energy technologies (tax-and-invest)
and/or in energy efficiency programs (tax-and-caulk).”[11]
3.     Comparative
Analysis (Highlighting the Strengths and Weaknesses of Both Strategies
Cap-and-trade and carbon trade as discussed
are both market-based legal strategies used to address adverse impacts of
climate change. However, they will be compared and contrasted under the
following subheadings:
3.1.  Innovation-Both
cap-and-trade similarly encourage innovation in the way industries or large
entities generate/consume energy. To take advantage of the trading part of
cap-and-trade, a polluter would require to reduce emissions and either save or
trade allowances. In carbon tax, polluters are forced to look for alternatives
sources for their energy needs to avoid paying carbon taxes. Thereby driving
innovation or forcing the development and deployment of new technologies.
3.2.  Revenue Generation-Both
strategies are possible revenue generators. Cap-and-trade can also generate
revenue for government if the initial allowances are auctioned rather than
freely distributed. However, carbon tax is a certain way to generate revenues.
3.3.  Certainty/Uncertainty-Both
strategies share similarities and difference regarding certainty/uncertainty.
While cap-and-trade firmly conveys the amount of emissions to be allowed (the
‘cap’), carbon tax does not. Conversely, carbon tax guarantees the amount of
revenue to be received from the regulation, but cap-and-trade does not.

3.4.  Monitoring/Report
Requirements
-Both strategies require close monitoring, reporting and
verification of reports to be successful. Without the regulators close
monitoring of the program, issues of fraud and misrepresentations may defeat
the exercise.
3.5.  Independence/Dependence-One
of the not so popular characteristics of these two strategies are their
independence/dependence on the intervention of the regulators. For
cap-and-trade, as soon as the initial allocation of the allowances are made,
emission regulation becomes market controlled, thus requiring little or no
governmental intervention. However, for a carbon tax, the regulator will
continuously monitor the operation of the program to ensure that the tax has
not been a burden to businesses or become too little to matter, as such,
requiring adjustments.
3.6.  Economic Justice/Equity-Both
strategies raise the price of energy (both electricity and gas) bringing
additional adverse economic impact on low-income consumers. Nonetheless, these
impacts can be mitigated by utilizing the collected revenue (where allocation
was auction in cap-and-trade) in a way that ameliorates its impacts on
low-income households. Similarly, if not adequately implemented and regulated,
cap-and-trade may create emission hotspots, especially within the low-income
communities. Even if the reduction in GHGs are widespread, that of
co-pollutants remain a conundrum as they impact on local environment.
3.7.  Regulatory Framework-Both
strategies would require a legal framework and/or enabling legislation to be
implemented. It is thought that while cap-and-trade may require an entirely new
implementation framework, carbon tax may piggyback on existing tax frameworks.

3.8.    Flexibility-Cap-and-trade
is the most flexible of both. While polluter may choose to either reduce their
emissions by investing in better technologies, some may easily buy allowances
to continue usual operations. However, carbon tax offers no such flexibility.
Indeed, even if polluters desired to switch from fossil fuel EGU to cleaner
burning fuels, such as natural gas, such moves require major investments and a
major overhaul.
4.       Conclusion
In view of the above comparative analysis,
I am of the view that the cap-and-trade strategies offers much more than the
carbon tax does. For one, one of the strongest points in favour of carbon tax
is its revenue certainty, if cap-and-trade adopts the auction method for the
distribution of initial allowances, it would be carbon tax in addition to
trade. Finally, another cap on the feather of cap-and-trade is its tremendous
success in United States (the Program) and in the European Union.

[1] Perry E. Wallace, Climate Change, Corporate
Strategy, and Corporate Law Duties, American University Washington College of
Law Digital Commons @ American University Washington College of Law, 2009
[2] United States Department of State, Addressing
Climate Change: A Top U.S. Priority, http://www.state.gov/r/pa/pl/223165.htm
[3] Wikipedia,
https://en.wikipedia.org/wiki/Greenhouse_gas#Greenhouse_gases
[4] Eleanor Revelle, Cap-and-Trade Versus Carbon Tax:
Two Approaches to Curbing Greenhouse Gas Emissions, retrieved from:
http://lwv.org/content/cap-and-trade-versus-carbon-tax-two-approaches-curbing-greenhouse-gas-emissions
[5] Environmental Defence Fund, How Cap and
Trade Works
, Retrieved fromhttps://www.edf.org/climate/how-cap-and-trade-works (December
17, 2016).
[6] U.S. Environmental Protection Agency, Acid Rain
Program Basic Information. Available at:
http://www.epa.gov/airmarkets/progsregs/arp/basic.html
[8] Carbon Tax Centre, Pricing Carbon Efficiently and
Equitably,https://www.carbontax.org/whats-a-carbon-tax/ Retrieved
December 17 2016.
[9] Id.
[11] Eleanor Revelle, Cap-and-Trade Versus Carbon Tax:
Two Approaches to Curbing Greenhouse Gas Emissions, retrieved from:
http://lwv.org/content/cap-and-trade-versus-carbon-tax-two-approaches-curbing-greenhouse-gas-emissions

Magnus
Amudi
Corporate, Energy and Environmental Law
Practitioner

Ed’s Note – This article was first published
here.