The Case for an Emissions-Trading System to Help Resolve the Climate Change Crisis
To deal adequately with the climate change crisis, an emissions-regulating system is required to help resolve the following policy goals: (i) ecological sustainability—which requires, among other things, stabilising the atmospheric concentration of greenhouse gases at no more than 450 ppm of CO2-e; (ii) distributional equity—which involves efforts to narrow the income gap between rich and poor and to ensure the needy have access to basic necessities; and (iii) allocative efficiency—which requires a price to be assigned to greenhouse gas emissions to induce a shift away from fossil fuels; maximise the use value generated from the emission of greenhouse gases; and encourage the development and use of greenhouse gas-abatement technologies. The system must also be designed to resolve these policy goals in the above order. It is argued in this chapter that these requirements can only be satisfied by implementing an emissions-trading system. There are, however, many observers who believe that an emissions-trading system is inferior to an emissions tax. The preference for an emissions tax is based on a number of assertions. Following a brief outline of the key features of an effective emissions-trading system, this chapter repudiates these assertions and explains the many advantages that emissions-trading systems have over emissions taxes. Because of market imperfections and non-market barriers, assigning a price to greenhouse gas emissions via an emissions-trading system does not guarantee the realisation of all economically viable abatement potential. In response, this chapter concludes with complementary forms of government intervention to help a nation cost-effectively achieve its emissions targets.