In the one hundred eleventh Congress, considerable attention was given to capand-trade legislation. The American Clean Energy Security Act of 2010 (introduced by Congressmen Waxman and Markey) passed the House, though the Senate version of the bill (Kerry-Lieberman’s American Power Act) was never put to the vote. With the prospects for cap-and-trade legislation stalled (and not helped by depressed prices in the European Trading System), and the need to strengthen the U.S. fiscal position, increasing attention is being paid to a domestic carbon tax. 1
Although both of these policies would place a price on greenhouse gas (GHG) emissions, they behave differently under uncertainty (e.g., about future fuel prices and technology costs). A cap-and-trade policy (at least in its pure form without price stability provisions) specifies an emissions quantity target, leaving the carbon price uncertain, while a carbon tax specifies a price, leaving the quantity of GHGs uncertain. Economists generally recommend that emissions prices are stable (though rising) over time, to help equalize incremental abatement costs in different periods, and create a stable environment for clean technology investments (e.g., Pizer 2005). However, international negotiations generally focus on specific emissions reductions pledges, and the quantity of GHGs realized under a policy may be of significant domestic concern, so it is important to understand what emissions prices might be consistent with alternative emission reduction targets.