Carbon Pricing: What Is It and Why Isn’t It Working

Initiated due to the increasing global threat of climate change, carbon pricing forces those responsible for emitting carbon into the atmosphere to pay for it. Rather than placing the burden of reducing carbon emissions on one governing body, carbon pricing gives major polluters the option to adopt greener practices or pay a higher cost to continue with business as usual.

2 Types of Carbon Pricing

Carbon pricing comes in two different forms — emissions trading systems (ETS) and carbon taxes. Also known as the cap-and-trade system, ETS limits the total amount of greenhouse gas emissions, gradually reducing the cap in time. Each company is permitted a certain number of emissions permits that progressively decrease over time. Establishing a supply and demand for emissions allowances creates a market price for greenhouse gas emissions. Setting a limit on emissions helps enforce the reductions and allows companies to steadily ease into the new limits.

Another system, imposing a carbon tax, gives carbon a price by establishing a set tax rate on greenhouse gas emissions. Rather than limiting the about of emissions, this form forces polluters to pay up. Ultimately, the total amount of emissions is unknown with this route.

The Problem with Carbon Pricing

In a perfect world, carbon pricing would encourage companies causing the most harm to the environment to clean up their act. Rather than opting to pay the penalty fee, these organizations would invest in clean technology, creating a ripple effect that inspires entire industries to go green.

Unfortunately, both carbon pricing tactics include rock bottom prices for carbon. Consequently, these low prices have been unable to have much impact on reducing emissions or encouraging companies to invest in low-carbon technology. Currently, most carbon markets and taxes are priced notably less than $15 per metric ton, which is significantly lower than the $44 per metric ton the International Emissions Trading Association estimated is needed to meet the goals set by the Paris Agreement. Significant measures need to be taken to make reducing carbon emissions a financial necessity for companies — not just an environmentally-friendly option.

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