Posted on October 6, 2010 by

How to move forward on the climate change policy is a key issue gripping the Australian government. Statements have been made in the favor and opposition of both options – carbon tax or emission trading scheme. Both systems have their own pros and cons.

Carbon Tax

A carbon tax sets a price on either the emissions of carbon dioxide or the amount of carbon embedded in fuel. Thus, under a carbon tax the price is set and the level of emissions is variable.

Cap and Trade

In an emission trading scheme (also known as cap and trade), which is a market-based approach for controlling green house gas emission, reductions are achieved by providing economic incentives for achieving reductions in the emissions. Thus, under an ETS the level of emissions is set and the price is variable.


In carbon tax, there is arrangement to set what the price on carbon will be when setting the tax rate.  Hence it is necessary to set fix tax amount in such a way that it would force to increase levels of emission reduction with required targets. Therefore there is no assurance with a carbon tax that any particular level of carbon emissions reduction will be achieved.

In ETS, Government sets emission levels (here emission cap) and price depends on market status. (Best examples is European Union Emission Trading Scheme)

A carbon tax will usually be administratively simpler and cheaper than an ETS; it requires registry and platform for trading whilst carbon tax can be implemented through the existing tax system using existing administrative arrangements.

Each carbon tax and ETS has its own positive and negative attributes. In Australia there might be many uncertainty of introducing any climate change measures, whether it will be an ETS or a carbon tax due to political risks.

The decision on this issue, which is long overdue will provide a concrete direction to Australia’s GHG and Climate change policy.

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