What is the difference between carbon tax and carbon credit?
The concepts of carbon tax and carbon credits are tools designed to reduce greenhouse gas (GHG) emissions, but they operate in fundamentally different ways.
A carbon tax directly sets a price on carbon by levying a tax on the carbon content of fossil fuels or the amount of GHG emissions produced.
It provides predictability and simplicity but has the disadvantage of a fixed cost and potential regressive economic impact.
Carbon Credits are part of a market-based and cap-and-trade system where companies or entities receive or buy credits that permit them to emit a certain amount of GHGs.
They offer market-based flexibility and an incentive for innovation but are more complex and carry the risk of market volatility and potential fraud.
Notable Differences:
- Carbon Tax directly influences the price of emissions, while Carbon Credits directly influence the quantity of emissions.
- Revenue generated by Carbon Tax goes to the government, while the trade of Carbon Credits generates revenue for entities selling excess credits.