How does a carbon tax differ from cap-and-trade as strategies to control emissions?

• A. A carbon tax sets a price for emissions; cap-and-trade sets a cap on total emissions and lets the market set a price through permits.
• B. A carbon tax sets a cap; cap-and-trade sets a price.
• C. Both policies fix emission levels with identical outcomes.
• D. Neither affects emissions.

Answer: (A)

The question tests the difference between price-based and quantity-based market-based environmental policies. A carbon tax directly sets a price on emitting carbon by charging a fixed amount per ton of CO2. Emitters face this known cost, which tends to reduce emissions depending on how responsive they are to the price, but the total amount emitted isn’t fixed by the policy itself—the market determines the exact level given the tax.

Cap-and-trade, on the other hand, fixes the total number of emissions by issuing a limited number of permits up to a cap. Firms must hold permits to emit, and they can buy or sell permits in a market, so the overall emissions are constrained by the cap, while the price per permit is determined by supply and demand in that market.

So the best statement is that a carbon tax sets a price for emissions, whereas cap-and-trade sets a cap on total emissions and lets the market determine the price through permits. The other options mix up price and quantity roles, claim identical outcomes, or say neither affects emissions, which misses the fundamental distinction.