What is the difference between cap-and-trade and carbon tax?

The main difference between cap-and-trade and carbon tax is the way they regulate and reduce carbon emissions.

Cap-and-trade is a market-based approach where a government sets a limit or cap on the total amount of carbon emissions allowed in a specific period. This cap is then divided into permits or allowances, which are allocated or sold to companies. Companies can trade these permits among themselves, allowing those who can reduce emissions at a lower cost to sell their excess permits to those who face higher costs. The overall emissions reduction is achieved by gradually lowering the cap over time.

On the other hand, a carbon tax is a direct tax imposed on the carbon content of fossil fuels or the carbon dioxide emissions produced. It sets a specific price per unit of carbon emissions, which companies have to pay. The tax can be levied at different stages of the supply chain, such as extraction, production, or consumption. The aim is to incentivize companies and individuals to reduce their carbon emissions by making it more expensive to emit carbon.

In summary, cap-and-trade focuses on setting a limit on emissions and allowing companies to trade permits, while carbon tax directly taxes carbon emissions to encourage reduction.