Carbon Taxes or Emissions Trading Systems?: Instrument Choice and Design

Year Published

2022

Contributing Organizations

International Monetary Fund (IMF)

Type of Resource

Research/Insights Report

Languages

English

Relevant Topics

Core Topic

Carbon Markets & Carbon Finance

Target Audience

Governments & Policymakers

Relevant Geography

Global

Resource Description

This resource compares carbon taxes and emissions trading systems (ETSs) as tools for carbon pricing, outlining their design, effectiveness, and interaction with broader fiscal and climate goals.

Why This Matters

Effective carbon pricing design is central to net-zero strategies. This resource helps policymakers weigh trade-offs and adapt instruments to national conditions while supporting international collaboration .

Key Insights

Carbon taxes offer price certainty, simpler administration, and stable revenues
ETSs provide emissions certainty but face price volatility and require more complex systems
Competitiveness issues can be addressed through free allocations or border adjustments
Revenue use is critical: taxes feed into general budgets, while ETS revenues are often earmarked
Political and legal contexts often shape which instrument is chosen
Both instruments need complementary measures, such as feebates or targeted support

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