An ETS caps the total level of GHG emissions and
allows industries to trade allowances based on
their marginal abatement cost. By creating a
supply and demand for allowances, an ETS
establishes a market price for GHG emissions
A Carbon tax directly sets a price on carbon by
dening a tax rate on GHG emissions or – more
commonly – on the carbon content of fossil
fuels. Unlike an ETS, a carbon tax is a price-based
instrument that pre-denes the carbon price,
but not the emissions reduction outcome of a
carbon tax.