Market solutions to climate change: can environmental taxes or emissions trading schemes effectively mitigate climate change?

Teah Murad



Year of study:


The direct and indirect impacts of anthropogenic climate change are already experienced by societies around the world. The transboundary nature of climate change and the severity of its long-term consequences necessitates international cooperation and governance to provide the most effective route towards mitigation. However, the complexity of national interests on the international plain and the infeasibility of supranational governance has created a conflict of accountability and enforceability of effective mitigation strategies. Considering climate change data from the IPCC, a time-series analysis of emissions from selected low- to high-income countries is conducted with respect to output prior and post implementation of either emission trading schemes or environmental taxation. This presentation then compares these mitigation strategies using the Pigouvian approach and double dividend hypothesis to determine the difference between the recorded level of pollution control versus an efficient level that considers all costs associated with relevant market activities to climate change. The utility of cap-and-trading versus emission charges are discussed in terms of this quantitative analysis. This presentation concludes that environmental taxation internalises greater environmental costs of market activities and generates higher economic incentives for households and firms to promote ecologically sustainable activities in comparison to emission trading schemes.