A Carbon Tax is the best way of combating climate change because it gives firms the most stable and easily predicted operating environment. A stable and predictable regulatory framework reduces risk, and risk is costly.
Cap’n Trade gives unpredictable price variations
Trade in Carbon Credits (Cap and Trade – or Auction and Trade) will result in a lot of on-off price signals to ensure that the target emissions reductions are met, and not over- or underfulfilled. These variations in emissions price will make companies that are heavily exposed towards the carbon price – either heavy polluters or very green – lose or earn money in an unpredictable fashion. Their operations will be disturbed, and some firms may even go bust due to an unexpected reversal in fortunes. Such price variation can be very expensive, and may wipe out entire industries – all for nothing since the reduction targets are all completely arbitrary, chosen for being assumed affordable and not for being “the exactly right reduction”.
Carbon Tax gives a predictable investment climate
A Carbon Tax on the other hand is easily predictable. Firms choosing to make investments in green technology must take a lot of risk to begin with – will the technology work, will the market buy their products – and the very least society can do to help is to give predictable operating conditions.