Which statement about carbon tax vs cap-and-trade is true?

• A. Cap-and-trade sets a direct price on emissions; carbon tax establishes a cap.
• B. A carbon tax creates a trading market for permits.
• C. Carbon tax imposes penalties after emissions exceed limits.
• D. Carbon tax sets a direct price on emissions; cap-and-trade sets a cap and allows trading of emission permits to reduce emissions.

Answer: (D)

Pricing emissions tools work in two different ways: a carbon tax imposes a direct price on each ton of CO2 emitted, giving emitters a predictable cost signal; cap-and-trade sets an overall limit on emissions and creates a market for emission permits that can be bought and sold to meet that cap. The statement aligns with this distinction: the carbon tax sets a direct price on emissions, while cap-and-trade establishes a cap and allows trading of emission permits to reduce emissions. The other descriptions mix up these roles: cap-and-trade does not fix a single price on emissions, and a carbon tax does not by itself create a market for permits. A carbon tax is about a price signal rather than penalties after exceeding a limit.