Carbon Tax and Emission Trading Scheme

Carbon Tax and Emission Trading Scheme


In Australia and internationally, we have witnessed intense discussions concerning the best policy to reduce greenhouse gas emissions. The two main proposals are a carbon tax (CT) and an emissions trading system (ETS) which give emitters the right to release greenhouse gas (GHG) emissions at a cost. A carbon tax is a fixed price levy on the carbon content of the use of fossil fuels, with the level determined by the authorities. By contrast, emissions trading programs set a limit on the amount of carbon or GHG emissions installations can emit, allowing participants to trade allowances to cover their needs, with prices set by market dynamics. A long time ago, Martin Weitzman (WEITZMAN, 1978) argued that, in states of uncertainty, it is necessary to have policies that involve both price and quantity mechanisms: “…far from being a contradiction, is actually optimal in a world of uncertainty” (WEITZMAN, 1978). Weitzman pointed to policies to control pollution as a clear case in point. Instead of pursuing Weitzman’s findings, we have had an ‘either-or’ debate, with the ETS supported by proponents of free markets and small government and the Carbon Tax by those who expect government to direct private enterprise through the introduction of regulatory systems that include both corrective incentives and penalties. Reviving with this statement and applying some theories further, we would research briefly how carbon tax and emission trading scheme is accounted on financial statement of a company.

Literature Review

Several countries have implemented a carbon pricing policy which includes carbon taxes and emission trading scheme, as well as hybrids of these instruments. In the early 1990s, many European countries, particularly the Scandinavian nations, began implementing energy and carbon taxes aimed at reducing emissions and raising revenues (Querejazu, Oct 2012). Since Finland introduced the world’s first carbon tax in 1990, many governments have...

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