As we saw earlier in this chapter, two policies would place a price on
GHG emissions: an emissions tax and a cap-and-trade system. A tax on
GHG emissions would directly increase the cost to polluters; a cap-and-
trade system would force polluters to purchase costly permits in order to
emit greenhouse gases.
Putting a price on GHG emissions would have two main advantages.
First, by raising the price of carbon-based energy, users would be led to
economize. Large cars would eventually be replaced by smaller vehicles,
and carpooling and public transportation would become more attractive.
The higher price of energy would also show up on electricity bills very
quickly, thus providing people with a clear incentive to examine how best
to reduce energy use within the home.
The second advantage of having a price on GHG emissions is that it
would raise the relative price of carbon-based energy and thus make
alternative, cleaner energy sources more competitive. For example, the
current price of electricity in Saskatchewan is roughly 12 cents per
kilowatt hour, and much of Saskatchewan’s power is produced in coal-
burning electricity plants. At this price, operators of wind turbines and
solar panels cannot fully cover their costs, and thus very little of this
alternative power is available. But suppose a tax on emissions raises the
price of electricity to 16 cents per kilowatt hour. At this higher price, wind
and solar power may be able to cover their costs, even though there has
been no change in their basic technology. By forcing the owners of
carbon-based energy to sell their product at a price that includes the price
on GHG emissions, thereby better reflecting the relevant external costs,