What is carbon pricing?
Carbon pricing is designed to capture the cost to society that major carbon polluters cause when adding GHG emissions to the atmosphere - such as rising temperatures and increases in the frequency and severity of droughts and floods. By putting a price on carbon, those that are most responsible for this damage have an economic incentive to reduce their usage of fossil fuels, lower emissions, and invest in cleaner energy sources. The two main carbon pricing mechanisms used are carbon taxes and emissions trading systems (ETS). These mechanisms cover emissions from various economic sectors, such as power, industry, and buildings, though they vary depending on the jurisdiction. In 2022, government revenues from carbon taxes and ETS reached a high of over 86 billion U.S. dollars.Carbon taxes and Emissions Trading Systems (ETS)
Under a carbon tax, governments set a fixed price that businesses and industries must pay for each metric ton of CO₂ (or equivalent) they emit from burning carbon-based fossil fuels in their operations. This in turn makes emission-intensive goods and services more expensive and less competitive. Carbon tax rates vary greatly worldwide, ranging from less than one U.S. dollar per ton of carbon dioxide equivalent (USD/tCO₂e) to more than 150 USD/tCO₂e in countries such as Sweden and Uruguay.ETS work on a cap-and-trade principle whereby governments set a limit on the amount of GHGs entities can emit each year. A fixed number of allowances are put on the market that allows the holder to emit one tCO₂ equivalent. These permits are either freely allocated or purchased through auctions. Firms are then able to trade these allowances with other emitters when and if they need to. The cap is reduced over time so that emissions continue to fall. Set up in 2005, the EU-ETS became the world's first international ETS. As of 2022, its value represented 87 percent of the global carbon market. In 2021, China launched its national ETS which covers some 4.5 GtCO₂ from its power sector, making it the biggest carbon market in the world in terms of coverage.
