By Clark Williams-Derry

British Columbia has established a carbon tax shift and is committed to putting a solid cap on carbon pollution as well. Overkill? No, that’s smart policy. With careful policy design, cap and tax can be better than either cap or tax on their own. The tax could toughen the cap, the way steel rebar strengthens concrete.

How would it work? Let’s start with some background on cap and trade.

A carbon “cap” is a legal limit on the quantity of greenhouse gases an economy can emit each year. Over time, the legal limit ratchets down—the cap gets tighter—until we’ve hit our emissions targets and set our clean-energy economy rolling. A firm and declining cap gradually drives down climate-warming emissions; the economy gradually adjusts by boosting energy efficiency and renewable energy, such as wind and solar power. Firms that reduce emissions quickly can sell or “trade” pollution credits to other firms—which gives them incentives to cut pollution.

Cap and trade has a strong track record of success, including a pioneering U.S. program for fighting acid rain. By combining market-based incentives with clear, enforceable goals, the acid rain cap-and-trade system reduced pollution from power plants by 40 percent in just a decade, at just a fraction of the cost of early projections.

A cap-and-trade program for climate-warming emissions offers the same advantages: clear targets; flexibility in how to reach the targets; and incentives for innovations that keep costs low. And if the program is designed well, cap and trade can also help consumers deal with the rising cost of energy. The trick is for the government to sell permits at an auction, rather than giving them to polluters for free. That keeps big energy companies from reaping windfall profits (at consumers’ expense), and also creates a stream of public revenue that can be invested in local clean energy and efficiency projects, or directly rebated to consumers to offset energy prices.

But under a cap and trade system alone, emissions prices are difficult to predict. Depending on what happens in the broader economy, the price of carbon could alternatively rise and collapse—which makes it hard for businesses to plan efficiency investments, and for the government to predict revenues from carbon auctions.

That’s where a carbon tax comes in.

Like cap and trade, a carbon tax puts a price on carbon emissions, creating incentives for energy efficiency and renewable power. With a tax, the price of carbon is predictable, but the environmental results are uncertain: there’s no guarantee that the emissions reductions will be as big as scientists say we need.

A tax is sometimes seen as an alternative to a cap-and-trade system. But the two can actually work quite well together. In fact, a hybrid system—both a cap and a tax—offers advantages that neither system can match by itself. The carbon tax guarantees that there’s always a clear incentive for cutting back on emissions, and ensures a stream of revenue to invest in clean energy and to help consumers deal with high energy prices. And the cap guarantees that we meet our long-term emissions goals.

For those interested in the details, a hybrid, “cap-and-tax model” could work a lot like a carbon auction with a “reserve price”—a price floor below which carbon credit prices can never fall. The reserve price acts the same way a tax would, keeping carbon prices and auction revenues on a more even keel.

A hybrid system—a tax plus a cap—would provide some predictability about prices, as well as a firm guarantee that we’ll meet our climate goals. The tax keeps the system moving forward, continually improving our performance. And the cap is like a sturdy guardrail that keeps us on the road to success, making sure that we make steady, secure progress in creating a climate-friendly economy.

Clark Williams-Derry is research director for Sightline Institute, a Seattle-based think tank working on sustainability policy, in particular reconciling economic prosperity with environmental and human health. He coauthored Sightline’s Cap and Trade 101: A Climate Policy Primer.