Carbon pricing is a market-based tool used to reduce greenhouse gas emissions, specifically carbon dioxide (CO2), by putting a price on each ton of carbon emitted. Carbon pricing seeks to make polluting activities more expensive and incentivize the use of low-carbon alternatives.
There are two main types of carbon pricing:
- Carbon taxes: Governments impose a tax on each ton of carbon emitted by companies, individuals or other entities. The tax amount can be set to reflect the social cost of carbon, which takes into account the environmental, health, and economic impacts of greenhouse gas emissions.
- Cap-and-trade systems: Governments set a limit, or cap, on the total amount of carbon emissions allowed by covered entities. Companies are then given a set number of emissions allowances, which they can buy and sell with other companies in the market. If a company reduces its emissions below the number of allowances it holds, it can sell the excess allowances, whereas if it exceeds its allowances, it must purchase additional allowances in the market.
Carbon pricing can help encourage the development and deployment of low-carbon technologies, increase energy efficiency, and shift investment towards sustainable infrastructure. It is seen by many experts as an essential tool in the fight against climate change.
Source:
- World Bank. (2019). State and Trends of Carbon Pricing 2019. Retrieved from https://openknowledge.worldbank.org/handle/10986/32436
- United Nations Framework Convention on Climate Change (UNFCCC). (2021). Carbon pricing. Retrieved from https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement/carbon-pricing
- Carbon Pricing Leadership Coalition (CPLC). (2021). About Carbon Pricing. Retrieved from https://www.carbonpricingleadership.org/about-carbon-pricing/
- International Emissions Trading Association (IETA). (2021). Carbon Pricing 101. Retrieved from https://www.ieta.org/resources/carbon-pricing-101/
- Environmental Defense Fund. (2021). Carbon pricing 101. Retrieved from https://www.edf.org/climate/carbon-pricing-101
