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Why Carbon Pricing Is Preferable to Carbon Regulation

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Climate Change

Jonathan H. Adler | 9.21.2021 1:40 PM

A new paper from the Niskanen Center explains why "carbon pricing" is a better way to reduce greenhouse gas emissions than traditional emission control regulations. As study authors Suting Pomerlau and Ed Dolan explain, setting a price on carbon (such as through a tax) allows for the more efficient reduction of greenhouse gas emissions because the costs of emission reductions can vary widely across sources. The result is more cost-effective emission reductions and the imposition of fewer constraints on economic dynamism. Moreover, carbon pricing regimes more readily accommodate changes in technology over time than do centralized regulations.

One common complaint about carbon pricing, and a carbon tax in particular, is the potential regressive effect of increasing energy prices. Yet as Pomerlau and Dolan note, such regressive impacts can be readily addressed by rebating carbon tax revenues.

While the potentially regressive effects of carbon pricing are widely discussed, there is relatively little attention paid to the regressive impacts of other proposed greenhouse gas policies. As Pomerlau and Dolan note:

On purely theoretical grounds, there is no reason to believe that the impacts of environmental regulations are any less regressive than those of a carbon tax. Since regulations tend to raise the cost of doing business, they can be expected to raise prices of goods, with a disproportionate impact on the purchasing power of low-income households.

While traditional regulatory measures of greenhouse gas emitters are also likely to increase energy prices, such measures do not generate a revenue stream that could be rebated to offset the potentially regressive effects. Thus it is a........

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