I was recently asked this question by ABC Fact Check. Here’s my answer:
The core idea of an ETS is to limit the volume of emissions (of carbon dioxide) by creating a set of permits that must be used by emitters. The permits may initially be auctioned or given away. Since the permits are tradeable a market price will be determined by the demand for permits and the willingness of permit holders to sell their permits. By contrast, a carbon tax sets a price on carbon emissions and allows the market to determine the volume of emissions.
There are a large variety of schemes that resemble the ETS in general structure. Within the environmental area, both the Renewable Energy Target and the government’s Emissions Reduction Fund (if augmented with a baseline allocation and penalty structure) fall into this class. Other examples include taxi licenses, electronic spectrum auctions, and tradeable catch quotas in fisheries. None of these policies is normally described as a tax.