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Cap & Trade

Cap-and-Trade and Feebates Under Flexible Global Carbon Pricing

Cap and Trade

The carbon price target can be met by taxing carbon, cap and trade, or a carbon feebate. Under cap and trade, carbon revenues are defined as the market value of the carbon permits used (retired). 

Feebates

Feebates charge high-emission products a fee, and pay low-emission products of the same product a rebate. Fees and rebates are computed so that they sum to zero (the mechanism is revenue neutral).

Feebates are appropriate when consumers are myopic. For example, it is widely believed that consumers take account of only roughly half the lifetime cost of gasoline when they purchase a car. In this case, carbon pricing does not solve the problem. (It solve the externality market failure, not the myopia market failure.) Similarly feebates on new cars do not solve the externality problem. So both are needed, but both should be limited to solving their own problem.

Under a carbon feebate, say new cars are given a rebate of $2,000 for each 1/100 gallon per mile saved relative to average mileage, and cars are driven 100,000 miles. Saving 1/100 gallon per mile (from 25 to 33 mpg) would save, 1,000 gallons or about 10 tons of CO2. So the feebate pays $200 per ton of CO2 not emitted — a carbon price of $200/ton.

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