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However, with cap-and-trade there is an additional administrative requirement – the allocation of allowances.Early attempts at allocation of allowances – for example, the sulfur dioxide emissions trading system used by the United States in the 1990’s – allocated allowances on the basis of historical emissions by source.However, cap-and-trade has the advantage of making clear, through a market price for emissions, the actual cost of a stipulated quantity of emissions reductions.Furthermore, the market price for CO2 allowances under cap-and-trade automatically and continuously adjusts for changes in abatement cost over time as changes take place in the prices of fossil fuels, the demand for electricity, and the rate of technological change (The price for natural gas affects greatly the cost of abatement as demonstrated in my Brookings Working Paper.) Frequent changes in a carbon tax to adjust the tax level to the changing cost of abatement are likely to be administratively difficult and politically divisive. Both cap-and-trade and a carbon tax need to be enforced – emissions must be determined for various sources and penalties imposed if a source does not have the requisite allowances or does not pay the required taxes.In this case, the price becomes established by the market.A carbon tax, on the other hand, places a fixed price or tax rate on carbon emissions, which serves as an incentive to keep emissions low.Numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs, unless a significant share of allowances is auctioned.Both cap-and-trade and a carbon tax are subject to uncertainty about costs.

The two organisations have been less enthusiastic about technology-focused emission-reduction frameworks.Trading brings flexibility that ensures emissions are cut where it costs least to do so.A robust carbon price also promotes investment in clean, low-carbon technologies.Carbon taxes on fuels for transportation and heating and cooling of buildings in some instances have been popular, especially when designed to be tax neutral in that carbon tax revenues are used to reduce other taxes.The CSIRO and Energy Networks Australia (ENA) have spent two years analysing the future of Australia's electricity system.




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