According to Stanford Earth Matters Magazine, worldwide carbon emissions must shrink 10 times faster. Carbon pricing is gaining considerable momentum as we work to reduce emissions. It offers incentives to minimise energy use and holds polluters accountable and responsible.
Moreover, it is crucial in the transition to cleaner fuels and technologies. Carbon pricing translates carbon emissions into a cost and can be utilised by businesses and governments to address climate change. But what exactly does it entail, and how easy is it to implement?
What is Meant By Carbon Price?
Carbon price refers to a policy approach to minimising carbon emissions which utilises market mechanisms to place the cost of emitting onto the emitters. Put simply; it involves charging emitters for the tonnes of emissions of carbon dioxide they are producing. The goal behind carbon pricing is to discourage using carbon dioxide and emitting fossil fuels. This will help meet global pledges and emission targets.
Carbon price puts a price on carbon and enables society to hold emitters accountable for the impact of carbon on the planet. For instance, warming temperatures, threats to public health, polluting the atmosphere and increasing the risk of weather disasters. Moreover, placing a price on carbon can also create financial incentives for polluters that encourage them to minimise their emissions.
Carbon pricing is a strong policy instrument for fighting climate change and has a lot of advantages. It could help to decarbonise the world’s economic activity by altering the behaviour of investors, businesses, and consumers. Essentially, instruments like carbon pricing drive investments in clean technologies, which are crucial to tackling climate change. Additionally, it generates revenue and protects the planet.
In saying that, carbon pricing can be a complicated topic because it can refer to various pricing mechanisms. For example, carbon taxes and emissions trading systems would be some of the best-known carbon pricing mechanisms. However, it is important to note that while they serve the same purpose and support emission reductions, their underlying dynamics vary.
The Main Types of Carbon Pricing
According to the World Bank, there are two primary types of carbon pricing. These include carbon tax and emissions trading systems (ETS). Carbon tax places a direct price on carbon by defining a tax rate on the carbon content of fossil fuels or greenhouse gas emissions.
Emissions trading systems, or as they are occasionally known, a cap-and-trade system, cap the entire amount of greenhouse gas emissions and enable low-emitting industries to sell their additional allowances to bigger emitters. This mechanism creates supply and demand for emissions allowances and therefore establishes a market price for carbon emissions.
The cap also assists by ensuring the required emission reductions occur to keep the emitters within their pre-allocated carbon budget. The main difference between carbon tax and emissions trading systems is that with the carbon tax, the emission reduction outcome is not pre-defined, but the carbon price is.
Carbon pricing is becoming an increasingly popular mechanism due to the increased need to reduce emissions worldwide. This policy approach harnesses market forces to lower their emissions and address climate change by creating financial incentives. Carbon pricing is key to the development of clean technologies that will ultimately help us move away from fossil fuels and adopt cleaner fuels.