Carbon trading cuts emissions better than carbon taxes

Carbon trading limits the amount of carbon dioxide an organisation can emit. To emit more, organisations must buy unused carbon emission allowances from others.

A global study has found that in the fight against climate change, carbon trading is more effective than carbon taxes – fees levied based on the amount of carbon dioxide emitted – in reducing carbon emissions.

Co-led by Assoc Prof Ru Hong from NTU’s Nanyang Business School and Prof Jennie Bai from Georgetown University, the study analysed the 100 largest economies in 2020, unlike previous research that only focused on specific countries or the spillover effects to adjacent territories.

Using emissions data from 2000 to 2020, the study showed that carbon emissions fell by a substantial amount – about 18% on average – in countries that pivoted to carbon trading. The study also found a nearly 24% drop in the use of fossil fuels, such as coal, while the use of renewable energy sources increased by nearly 62% on average.

In contrast, the impact of carbon taxes was less clear. While some reduction in carbon emissions was observed, it occurred before the taxes were implemented as well, making it difficult to determine causality. Moreover, carbon taxes did not cause a major shift towards renewable energy.

Still, one problem with carbon trading is that many countries need to be involved in it before it can work, says Assoc Prof Ru.

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The findings were published in “Carbon emissions trading and environmental protection: international evidence” in Management Science (2024), DOI: 10.1287/mnsc.2023.03143.

The article appeared first in NTU's research & innovation magazine Pushing Frontiers (issue #25, August 2025).