Carbon Tax vs Cap and Trade. The market concentration may have the last word on climate change policy : An evaluation for the energy sector in Colombia

Abstract

This study reviews two approaches of carbon pricing to address climate change at the policy and economic level. It compares carbon tax with the cap and trade scheme in the energy industry of Colombia. The pros and cons of the two approaches are evaluated through focusing on the particular features of the Colombian context. These are: a highly concentrated market, with market power and heterogeneous productivity amongst firms. I conclude that the carbon tax is likely to be more effective and easier to implement at policy level.