Climate change, driven by human activities, results in global warming, sea level rise, extreme weather, biodiversity loss, and ecosystem damage. To combat these issues, carbon pricing is being utilized. This policy strategy assigns costs to greenhouse gas (GHG) emissions, considering their negative impact on society and the environment, thus encouraging reduction of emissions. Two main methods of implementing carbon pricing are emissions trading systems (ETS), where the carbon price is market-determined, and carbon tax, where the carbon price is pre-established. This study compares carbon taxes and ETSs as regulatory measures for mitigating climate change. Focusing on aspects of policy design and implementation— efficiency, political durability, policy consistency, flexibility and adaptability, predictability, and environmental certainty—the main argument of the study hinges on the distinct nature of price formation in these mechanisms - carbon taxes define prices directly, whereas ETSs rely on market dynamics for price determination. This fundamental divergence significantly shapes the operational dynamics of climate mitigation policies. The study highlights the unique strengths and limitations inherent in ETSs and carbon taxes, underscoring the necessity of viewing these mechanisms not as alternatives but as synergistic strategies for a policy design in combating climate change.
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