Project Management Problem Solving and Decision-Making

Carbon Tax

Carbon Emissions: Tax or Trade?

One of the central topics in the ongoing debate about global warming, carbon emissions, and the needs of businesses is whether governments should implement taxes on carbon emissions, construct an artificial carbon trading market and let the "invisible hand" place some controls on current and future pollution levels, or utilize some combination of these two options. There are many different ways in which to approach and address this debate, yet to develop an effective and meaningful decision in this regard a rational and objective decisions making model must be employed, rather than allowing specific political, environmental, business, or emotional arguments to enter the picture. This paper will attempt to apply certain specific decision making models to this issue in order to determine whether a carbon tax, a carbon trading system, or a combination of the two is most appropriate.

One method for such complex decisions is to develop a single criterion from the disparate criteria that actually exist as influences on a given issue, such as by weighting each individual criterion. In order to create a carbon market, for instance, the "market rate" for carbon emissions would need to be determined and weighed against the costs of reducing carbon emissions in order to develop an understanding of how this market would operate and what prices would need to be set to control emissions (Chapter 3). A carbon tax would be simpler to implement, as the cost of carbon emissions would be determined unilaterally by the government and the only criteria that would have to be considered would be the price at which an increase in the carbon tax no longer offers a significant reduction in pollution compared to the business inhibitions it creates.

Another way to approach this issue is to pick one primary or "real" criterion, and to view all other criteria as constraints on this one central concern. In this issue, this central criterion would have to be the improvements to society that are achieved by a reduction in carbon emissions, with other considerations such as the needs of business and the additional costs (and incomes, in the case of a carbon trading market) seen as constraints on this issue. A carbon trading market would not be as effective at promoting this one central criterion, as certain high-polluting business would likely find it more cost effective to simply "trade" their excess carbon emissions for the unused allotments of carbon from another company that likely would not have been polluting a great deal in the first place. A carbon tax, on the other hand, is a burden that becomes fairly distributed base done missions, providing a direct incentive to reduce these emissions and thus meeting their central criterion more effectively.

A more complex approach would be to design specific solutions that optimize each identified criterion, and then to "trade off" these solutions to arrive at an optimized whole. A carbon trading scheme under this framework would fail for the same reasons as described above: the very nature of the tradeoff would lead to inefficient movement in carbon reductions without providing commensurate reactions in the other criteria -- business would not be directly impacted to a large degree by continuing to pollute, thus there would be no incentive no to. A carbon tax, on the other hand, encourages businesses not to pollute, provides funds for the government to deal with pollution, and presents controllable and projectable costs to businesses.