TAX WHAT YOU DON'T WANT AND FORCE INNOVATION:

Key Takeaways

Carbon pricing, either in the form of a carbon tax or a cap-and-trade system, has the potential to limit pollution to an economically optimal level. 

Carbon pricing allows various pollution sources with differing marginal abatement costs to achieve emissions reduction efficiently whereas regulations tend to treat all pollution sources alike.

Carbon pricing has greater efficiency advantages over regulations when technology changes over time than when it is fixed. 

A carbon tax combined with revenue recycling would be a less costly policy to reduce emissions than regulations of comparable effectiveness.

It is difficult to compare the distributional impact of carbon taxes to that of regulations, as there is substantial analysis of the distributional effects of a carbon tax but very limited information on how environmental regulations would impact various demographic groups.

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