Carbon Pricing for Greenhouse Gas Emission Reduction: Carbon Tax or Emission Trading?

It is considered that greenhouse gas emissions released into the atmosphere since the Industrial Revolution as one of the biggest market failures caused by humanity have harmed social welfare by creating negative externalities and led to climate change. Government involvement in reducing emissions can be achieved through carbon pricing, which increases the cost of emissions and encourages low-carbon alternatives. Carbon tax or emissions trading can be used to implement carbon pricing. Both tools raise the cost of carbon-containing fossil fuels, forcing producers and consumers to shift to a low-carbon economic system. However, the implementation of these tools may produce different outcomes in practice. This research aims to analyze carbon tax and emission trading system applications and compare their consequences in detail. It also compares carbon pricing mechanisms with other emission-reduction tools. The outcomes obtained from a comprehensive literature survey indicate that results may vary by the design of the economic instrument, market conditions, and the country's economic structure.