When considering the economic mechanisms proposed for reducing emissions, we need to consider firstly an international framework that fairly shares this responsibility between nations. Secondly, we need to consider the mechanisms that nations may choose from in meeting the obligations they have agreed to under the international framework. I suggest we need to carefully evaluate both the international framework, and the options available to national governments according to three criteria. We should choose between them by comparing their effectiveness, equity and simplicity. Once targets for individual nations are set (see political solutions), national governments could choose one of the three main mechanisms below to reduce their emissions. Each mechanism could also be coordinated between nations in order to facilitate an international framework.
The oldest and most well known mechanism is called "Cap and Trade", or an "Emissions Trading Scheme". The national emission target set by the international framework is auctioned to large producers of greenhouse gases. Emission rights can then be traded between these producers. This trade includes carbon credits generated by sequestering carbon. The trading system sets a market price for greenhouse gas emissions. As targets are tightened, this price increases over time until it is more economical for industry to use renewable energy..
There is another approach to controlling climate change an alternative mechanism to Cap and Trade called "Cap and Dividend." Formulated by U.S. think tank On The Commons, it also is based on per-capita emissions rights, but these are used to limit the production of fossil fuels rather than to monitor emissions as these fuels are consumed. It may be simpler and more effective in controlling the main cause of global warming, which is CO2 emissions from fossil fuels. However, it doesn't control CO2 emissions from land clearing, or other greenhouse gases such as methane, nitrous oxides, and CFCs. The model is not yet as well-developed as Contraction and Convergence Cap and Trade. I haven't yet taken a position on it, but leave it as an alternative for you to investigate I think it is worthy of consideration. A similar mechanism to Cap and Dividend is the "Cap and Share" scheme promoted by Fiesta. The latter distributes emission rights to individuals as vouchers, which they sell to producers of fossil fuels.
The alternative to all "Cap" mechanisms is a carbon tax. While it is a new tax, it does not need to add to the overall tax burden, because the revenue can be used to reduce or abolish other taxes. The tax mechanism I think has considerable merit is the "Tax and 100% Dividend" scheme promoted by climate scientist James Hansen. Norway has levied a carbon tax since 1991 . Other nations that have a carbon tax are Sweden, Finland, Netherlands and Italy.
Each of the mechanisms above is theoretically capable of dramatically reducing emissions at a national level. Each will result in windfall revenues which to be politically acceptable will need to be offset with reductions in income tax, reductions in other taxes, and rebates or other measures to compensate the less well-off. Provided a method can be devised for crediting sequestered carbon, I tend to prefer a carbon tax, or Cap and Dividend, to Cap and Trade. I leave you to research these mechanisms further to form your own opinion of their relative effectiveness, equity and simplicity.
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