Carbon Policies

The Tragedy of the Commons

When discussing carbon policies it is first good to know why there are such policies in place or why they are even talked about. The production of carbon emissions falls into this idea of the tragedy of the commons. The tragedy of the commons occurs when a shared resource is used by people or companies in their own self interest and the common good of everyone or society as a whole is ignored. Carbon emissions fall into this category because large companies and people produce mass quantities of carbon emissions for their own benefit but it negatively impacts society as a whole. Certain carbon policies are put in place to try to limit the negative impacts that occur from emitting carbon emissions.

Cap and Trade System

Currently some states in the U.S. use a cap and trade system to try and regulate green house gas emissions or more specifically carbon emissions. A cap and trade system sets a cap on carbon emissions for specific industries. So one specific industry will be given a certain amount of emissions that they are allowed to have. They then take that amount and split it up into allowances for each company. The average allowance is around one ton of emissions. These allowances are distributed for free or sometimes through an auction system. Over time the idea behind it is to slowly start reducing the total cap to lower and lower levels. The trade aspect of it allows companies to trade allowances between other companies. If a company will not produce the allotted amount that is given to them then they can trade some of their allotment to another company or save it for the next year. The reason for this is because it is suppose to encourage companies, more so on their own, to reduce their emissions levels. If a company reduces their emission levels then they can sell off the remaining amounts and make money from it. It is what some economists call a more free market way to regulate emissions. Also, if a company goes over the allotted amount they were given then they are fined money for it. It is a round about way to implement an emissions tax without actually taxing all the emissions. Currently, this type of policy is not implemented on the federal level. There are certain states in the U.S. that have grouped together to implement policies like this. Certain states have used the auction method to help drive up tax revenues in their state.

Carbon Tax System

A carbon tax is a tax specifically on carbon-based fuels. Carbon-based fuels are the main source of the man made carbon emissions in the atmosphere. Carbon emissions, which is in the form of CO2, are measured in CO2 emissions per million BTU. For each amount of fuel burned, an exact amount of CO2 emissions will be released. So one way CO2 emissions is measured is by looking at how much fuel is burned. A carbon tax would then just tax the amount of fuel that is burned rather than trying to measure the CO2 emissions. It is normally implemented so that the more fuel burned, the higher the tax rate. This means that as production of carbon emissions increase, or consumption of fuel increases, the more tax that is implemented on the individual or corporation producing or consuming it.

There is specifically two ways to implement the tax. The first way focuses on only taxing the major corporations that produce carbon emissions. To explain more, lets look at a company like Halliburton. They mass produce oil throughout the world. They would be taxed for the oil that they produce, not just the CO2 emissions emitted. The reason for this is because if they were only taxed on how much carbon emissions they emit then they could continue to produce oil yet barely be effected by this tax. Oil consumption, or CO2 emissions, would not necessarily decrease then. This method puts pressure to reduce carbon emissions on the producer rather than the consumer. The second way to implement the tax is to tax everybody that produces CO2 emissions. This methods includes the individual as well. Lets take a look at the example we used previously. The company Halliburton would then only be taxed for the CO2 that they actually emit. The oil they produce would then be taxed on the actual consumers. For example, the gas that people buy to put in their car would be taxed. This method puts pressure on the consumer rather than the producer to reduce CO2 emissions.

Both methods have pros and cons to it. The method that taxes only the corporations focuses on the supply side of things. The ideology behind it is if they can reduce the supply of it, then the amount of consumption would have to decrease since there is less of it. The method that taxes everybody focuses more on the demand side of things. Since prices would increase, the amount consumed would decrease and how much demanded would decrease. This would then trickle up to the corporation and they would have to start producing less since less is being consumed. Both methods would result in a decrease in CO2 emissions but how it impacts on the economy varies.