The document compares carbon taxes and cap-and-trade approaches to reducing CO2 emissions. It argues that carbon taxes are superior to cap-and-trade for three main reasons: 1) Cap-and-trade systems are too complex, prone to corruption, unpredictable, and not viable long-term; 2) Developing countries taking on carbon offset credits through cap-and-trade risk accumulating unsustainable debt; 3) Economists agree that carbon taxes are more efficient and effective at reducing emissions than cap-and-trade.

1. Carbon Tax Vs. Trade: When the Forest Burns
By: Seann W. Smith, AICP
What happens when the forest burns?
The following is my first draft (a lot of work remains to finish the endnotes) of a position
paper looking at a number of current global climate change issues facing the city of
Guangzhou and Guangdong province. This portion focuses on the advantages of carbon
taxes over carbon trading approaches to CO2 reductions. This is timely and relevant to
both the City and the Province, with current plans for carbon trading1
and the potential
impacts of climate change2
.
Trade
When the forest burns…
Some advocate a ‘cap-and-trade’, and others advocating a ‘carbon tax’. When looking at
those that believe both have equal merit, there is an emphasis on the idea that a cap-and-
trade system would need a ceiling price3
, and that cap-and-trade works best with utilities4
.
For now, cap-and-trade systems will continue to expand. However, cap-and-trade is too
complex, corruptible, unpredictable, and so will not be used long-term.
Created by US economists5
, it will be too burdensome to implement. Details are arcane,
but take the example of forests, a central tool of cap-and-trade ‘sinks’, a form of carbon
offset, which are credits used to reduce emissions (‘sources’)6
. The central feature of sinks
is forests that provide a reduction exceeding 10% of US emissions7
. However, it takes a lot
of high-skilled labor to measure, requiring updates on every forest stand, every year.
Further, when they burn down, thus becoming a source, they take 80-100 years to regain
their sink status8
.
Europe’s system has a long history of failure, due in large part to corruption9
. The reforms
proposed for this system10
will not solve this problem, and this is in a relatively advanced
and regulated system.
Becoming the largest cap-and-trade program in the world11
, the Chinese model is far less
transparent, prone to corruption, and prone to volatility 12
… likely more so than the
European system. Guangdong is the largest program in China13
. Even applied to a
relatively simple system to track and enforce, such as coal fired power plants, will not work.
The result will be that the investments in cap-and-trade systems will be ‘written-off’. In
other words, nations that investment in developing the system of documenting,
authenticating, and monitoring, will be forced to abandon that investment. More specifically,
China’s ruling party will ‘lose face’ with internal stakeholders, undermining it politically.
Should the system develop enough, more developed nations will loan money to developing
nations that provide emission credits because they have more sinks. The result will be that
developing nations will again suffer from these debts, as they are set to with similar
adaptation loans1415
, and then default on those loans, as they have in the past.

2. Tax
"In this world nothing can be said to be certain, except death and taxes."
– Benjamin Franklin
The main reason a carbon tax is not studied/used is political. US Republicans will not
tolerate new taxes. As a result, Democrats had hoped for cap-and-trade legislation,
because they do not require new taxes, and satisfied more extreme elements of the
Democratic Party (environmentalists and labor unions). For instance, up to now, the US
has been able to claim China unfairly supports its renewables industry. A carbon tax would
lead to more support of US firms, undermining an argument for WTO actions against
China, a tactic favored by labor unions, which is an important element of the Democratic
base. However, with the failure of cap-and-trade legislation, interest in a carbon tax is on
the rise16
.
A carbon tax is seen in policy circles (likely at the DOE) as superior to the cap-and-trade
system that is currently more politically acceptable in the US17
. Further, economists agree
a carbon tax is the best approach1819
. Political20
and policy21
support is building for climate
change funding, which will continue to lead to more support of a carbon tax.
Annotated Endnotes:
1
Munnings et al. RFF. Assessing the Design of Three Pilot Programs for Carbon Trading in China.
(Munnings)
2
World Bank. Which Coastal Cities Are at Highest Risk of Damaging Floods? New Study Crunches
the Numbers. August 19, 2013. “In terms of the overall cost of damage, the cities at the greatest risk
are: 1) Guangzhou. … The study lists the 10 most vulnerable cities when measured as percentage of
GDP as: 1) Guangzhou. …” http://www.worldbank.org/en/news/feature/2013/08/19/coastal-cities-at-
highest-risk-floods
3
Goulder and Schein. Carbon Taxes Versus Cap and Trade: A Critical Review. Nov. 13, 2013. “If
properly designed, the two approaches have equivalent”
potential”.http://web.stanford.edu/~goulder/Papers/Published%20Papers/Goulder%20and%20Schein
%20-%20Carbon%20Taxes%20vs%20Cap%20and%20Trade%20-%20Cl%20Ch%20Economics.pdf
4
Frank, Charles. “Both cap-and-trade with a ceiling price and carbon taxes have useful roles to play, the
former in restraining emissions from large industrial plants and the latter in cutting emissions in
transportation, heating and cooling.”
http://www.brookings.edu/blogs/planetpolicy/posts/2014/08/12pricingcarbonfrank
5
“Under a cap-and-trade system, a concept created by American economists, governments place a cap
on the amount of carbon pollution that may be emitted annually. Companies can then buy and sell
permits to pollute.” http://www.nytimes.com/2015/09/25/world/asia/xi-jinping-china-president-
obama-
summit.html?_r=0&module=ArrowsNav&contentCollection=Asia%20Pacific&action=keypress
&region=FixedLeft&pgtype=article
6
“Under Article 3.3 of the Kyoto Protocol, Annex I Parties may use GHG removals, from afforestation and
reforestation (forest sinks) and deforestation (sources) since 1990, to meet their emission reduction
commitments.”
https://en.wikipedia.org/wiki/Emissions_trading
7
“Forest Land Remaining Forest Land: Changes in Forest Carbon Stock” is equal to: 775.7/6,673.0 MMT
CO2 Eq., or over 10% reduction due to forest carbon sinks in the US
http://www3.epa.gov/climatechange/Downloads/ghgemissions/US-GHG-Inventory-2015-Main-
Text.pdf

3. 8
After a fire, "on-the-ground research shows that carbon recovery occurs in approximately 80–100 years
if the stand regenerates. … The net ecosystem carbon balance, also known as net ecosystem
production (NEP) specifically quantifies the annual net change in carbon stored in the ecosystem… to
gauge whether a forest is a carbon source (negative NEP) or sink (positive NEP) … quantified on an
annual basis and for a single forest stand. But to determine whether an entire landscape (which is
composed of many stands of different ages) is a carbon source or sink over a longer time frame
annual NEP must be assessed over both space and time.” - 03-1-1-06_fsbrief86.pdf at:
https://www.firescience.gov/projects/briefs/03-1-1-06_FSBrief86.pdf
9
“Europol, Europe's criminal intelligence agency, said that as much as 90 percent of the entire market
volume on emissions exchanges was caused by fraudulent activity, undermining the very viability of
the ETS just as the EU is touting a similar scheme for the rest of the world.”
http://www.realclearworld.com/blog/2013/04/europes_capandtrade_scheme_fai.html
10
“What Reforms Are Planned? Some of the carbon allowances that were planned to be auctioned off in
the coming years will be withheld from the market, perhaps temporarily, beginning in 2018.”
http://www.climatecentral.org/news/europe-reforms-cap-and-trade-lays-out-climate-vision-
18706
11
Kimmell, Ken. “no one has tried a system on the scel China proposes.” http://blog.ucsusa.org/ken-
kimmell/
Four-challenges-for-chinas-cap-and-trade-program-909
12
Munnings P3-4(pdf7-8). “Our main recommendations are as follows:
1. Strengthen the legal foundation for the C&T pilots.
2. Incorporate achievement of goals established by the pilot C&T systems in the individual
performance reviews of participating government officials and the executives of participating state-
owned entities (SOEs).
3. Further clarify the cap-setting process.
4. Increase transparency of the cap by publicizing business-as-usual emissions and the emissions
impact of complementary policies. …
9. Adopt a symmetric safety valve to manage extreme price fluctuation.”
P29. “G. Provisions for Carbon Offsets . …Each pilot allows for the use of Chinese Certified
Emissions Reductions (CCERs), which are largely composed of carbon offsets from the Clean
Development Mechanism that have been repurposed for use in a Chinese context.
Both Guangdong and Shanghai acknowledge that the NDRC will have to first issue CCERs, with
Shanghai explicitly mentioning that the national government must verify that each CCER equals
one ton of carbon emissions allowances (Shanghai DRC 2013a).”
http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-14-36.pdf

4. 13
Munnings. P2.
14
“Some argue that the repayment of a loan, notwithstanding the degree of concessionality, burdens a
developing country with self-paying for a problem (climate change) that was caused by others (i.e.,
developed countries). They believe this burden may affect the country’s ability to generate resources
for growth.” https://www.fas.org/sgp/crs/misc/R41302.pdf
15
make “people in countries like mine pay twice for climate change, even though we played virtually no
part in causing the problem.” http://www.thesolutionsjournal.com/node/988
16
Goulder and Schein. Carbon Taxes Versus Cap and Trade: A Critical Review. Nov. 13, 2013. “Until
recently, cap and trade commanded most of the attention in policy circles. But interst in the carbon tax
seems to be on the rise, in the U.S. at least. Many U.S. policy makers, discouraged with the inability
to pass federal cap-andtrade legislation, are now setting their sights on the carbon tax.”
potential”.http://web.stanford.edu/~goulder/Papers/Published%20Papers/Goulder%20and%20Schein
%20-%20Carbon%20Taxes%20vs%20Cap%20and%20Trade%20-%20Cl%20Ch%20Economics.pdf
17
Ladislaw, CSIS. Dec. 14, 2015. “I think most people that you talk to who are off the record on the issue
will say they absolutely agree. I think the problem is that nobody sees a really near-term, viable,
political pathway to getting a carbon tax out of the US Senate.” –
https://thedianerehmshow.org/shows/20151214/negotiatorsinparisagreetoalandmarkclimateaccord
18
Morris, Adele. Brookings Institute - Want a Pro-Growth Pro-Environment Plan? Economists Agree:
Tax Carbon. February 7, 2013. "Economists nearly universally agree that, while basic energy
research and development remain an important role of government, a price on carbon would minimize
the cost of steering economic activity away from the greenhouse gas emissions... Disagreements can
and do arise around the details, such the appropriate level of the carbon price signal and the relative
merits of various flavors of the carbon taxes and cap-and-trade programs that could impose it. ...90%
agreed with this statement: “A tax on the carbon content of fuels would be a less expensive way to
reduce carbon dioxide emissions than would a collection of policies such as ‘corporate average fuel
economy’ requirements for automobiles.”"
http://www.brookings.edu/blogs/up-front/posts/2013/02/07-carbon-tax-morris
19
CarbonTax.org. "Economists overwhelmingly support a well-designed national carbon tax. "
http://www.carbontax.org/scientistseconomists/
20
“A majority of U.S. Republicans who had heard of the international climate deal in Paris said they
support working with other countries to curb global warming and were willing to take steps to do so.”
http://www.newsweek.com/cop21-paris-climate-accord-climate-change-republicans-gop-global-
warming-408358
21
Cusick, Daniel. ClimateWire - Renewables Boom Expected Thanks to Tax Credit. December 21,
2015 “"This is one of the most significant stimulus policies for the renewable sector I've seen in the
past 10 years," said Alex Klein, senior director of renewable power research at the consulting firm IHS
Inc.” http://www.scientificamerican.com/article/renewables-boom-expected-thanks-to-tax-credit/