Tax policies to reduce greenhouse gas emissions

This brief outlines the motivation for and key features of a tax designed to reduce emissions of greenhouse gases (GHGs). The two most commonly discussed market-based instruments for reducing GHG emissions are a cap-and trade system and a GHG (carbon) tax. These mechanisms function in a similar way by establishing a price for GHG emissions. They both correct the market failure that exists when the value of environmental damages is not included in the market price of fossil fuels and other activities that release GHGs.

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