Carbon trading schemes are more effective than carbon taxes at reducing greenhouse gas (GHG) emissions, cutting fossil fuel consumption, and accelerating the adoption of renewable energy, according to new research covering the world’s 100 largest economies.
The study, co-led by Associate Professor Ru Hong of Nanyang Technological University (NTU Singapore) and Professor Jennie Bai of Georgetown University in Washington DC, drew on emissions data from 2000 to 2020. Its scope sets it apart from prior research, which tended to examine individual countries or neighboring regions rather than taking a broad global view.
Countries that adopted carbon trading—systems that cap how much carbon dioxide (CO2) an organization can emit and allow excess allowances to be bought and sold—saw emissions fall by roughly 18% on average. Fossil fuel use dropped by nearly 24%, while renewable energy consumption rose by approximately 62%.
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Carbon taxes, which charge emitters a fee per tonne of CO2, produced murkier results. Some emissions reductions were observed, but they appeared to predate the introduction of the taxes, complicating any causal interpretation. The taxes also failed to drive a meaningful transition toward clean energy, the researchers found.
The findings carry weight in ongoing policy debates over which market mechanisms best serve climate goals. Carbon trading has gained traction in Europe, China, and parts of North America, while carbon taxes remain the preferred instrument in countries including Canada and several Nordic nations.
The researchers noted one significant constraint on carbon trading’s effectiveness: broad international participation is required for the mechanism to reach its full potential.
The study, titled “Carbon emissions trading and environmental protection: international evidence,” was published in Management Science in 2024.
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