Can a price be as strong as a cap?

Yes. This is indisputable because a cap changes behavior by creating a carbon price. If a certain cap causes the price to average $30/t, and a tax sets the carbon price at $30/t, the two policies will have the same effect. No consumer or businessman takes action because a cap is set at X million tons, rather they act because the cap makes it costly to emit carbon.

In fact, the EU is so upset with the price uncertainty caused by its ETS cap that it is now (22 Jan 2015) trying (unsuccessfully) to implement a โ€œmarket stability reserveโ€ which would periodically adjust the cap to produce a reasonably stable price. In other words it would almost turn the cap into a tax. (Financial Times, Guardian)


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