The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis

Abstract

There is widespread agreement among economists-and a diverse set of other policy analysts-that at least in the long run, an economy-wide carbon pricing system will be an essential element of any national policy that can achieve meaningful reductions of CO 2 emissions cost-effectively in the United States. There is less agreement, however, among economists and others in the policy community regarding the choice of specific carbon-pricing policy instrument, with some supporting carbon taxes and others favoring cap-and-trade mechanisms. This prompts two important questions. How do the two major approaches to carbon pricing compare on relevant dimensions, including but not limited to efficiency, costeffectiveness, and distributional equity? And which of the two approaches is more likely to be adopted in the future in the United States? This paper addresses these questions by drawing on both normative and positive theories of policy instrument choice as they apply to U.S. climate change policy, and draws extensively on relevant empirical evidence. The paper concludes with a look at the path ahead, including an assessment of how the two carbon-pricing instruments can be made more politically acceptable.

Strategic implications of carbon pricing on global environmental sustainability and economic development: A conceptual framework

“…The debate on the optimal carbon pricing mechanism continues, with considerations including economic efficiency, environmental effectiveness, and political feasibility. Stavins (2019) explores the comparative dimensions of carbon taxes and cap-and-trade systems, emphasizing the need for policies that can be adapted to the political and economic realities of each country , Ehimare, Orikpete & Ewim, 2023, Ntuli, et. al., 2024.…”

“…The concept of carbon pricing involves charging those who emit carbon dioxide (CO2) for their emissions, with the aim of reducing the amount of greenhouse gases released into the atmosphere. This approach is grounded in the principle of the "polluter pays," intending to internalize the external costs of climate change (Stavins, 2019). Carbon pricing mechanisms, such as carbon taxes and cap-and-trade systems, have been implemented in various forms around the world, reflecting a growing consensus on their effectiveness as tools for climate change mitigation ).…”

“…In the United States, the debate continues over the most appropriate carbon pricing mechanism, with economists and policy analysts divided between supporting carbon taxes and favoring cap-and-trade systems. Despite these differences, there is widespread agreement that an economy-wide carbon pricing system will be essential for achieving meaningful reductions in CO2 emissions in a cost-effective manner (Stavins, 2019). The implementation of carbon pricing has shown positive impacts in both developed and developing economies.…”

Political uncertainty and carbon emission trading: Evidence from China

“…For instance, in 2011, a computer-aided theft of carbon allowances in the Czech Republic caused significant disruptions in the EU-ETS market (Gronewold & Fialka, 2011). Even in well-regulated regions like the US, fraudulent cases have emerged, such as one in the RECLAIM system (Stavins, 2019). Understandably, China's MEE is wary of falsified data and potential collusion between firms and local governments.…”