Effective Policy for Reducing CO2 Emissions: Carbon Tax vs. Cap & Trade

The focal point of my research, carbon taxes and cap and trade systems, are the two most widely used CO2 reduction policies throughout the world. Both have been heavily debated in determining the maximum amount of utility with regards to efficiency and effectiveness with the least number of negative externalities. This paper is not a wholistic approach of each system, as others have done, rather this research’s aim was to determine which policy is more effective in the reduction of CO2 emissions. Because of their broadscale usage, they were examined amongst a plethora of additional factors that have already been linked to CO2 emissions, in order to hold ceteris paribus. Factors such as energy reliance based on coal and oil, affluence, education, and population density. The results produced are exciting as it clearly shows that cap and trade programs can produce a significant reduction in CO2 emissions per capita. However, due to a lack of observations for carbon taxes, throughout the world, the results came back insignificant. Thus, as more countries implement carbon taxes, the study might prove to be more useful in determining which policy is more effective in reducing CO2 emissions. Therefore, more time, and more data is needed, in order to determine the true effect of carbon taxes. Data on the variables such as oil consumption, population density, and coal produce significant results. With a range of adjusted R-Squares of .65 to .35, these models are able to predict a significant amount of a persons CO2 emissions within the 64 countries examined