Mechanisms for "Putting a Price on Carbon"Published on 01.06.2015
10 min read
Assigning a cost to CO2 and other greenhouse gas emissions by "putting a price on carbon" is recognized as one of the most effective means of combating climate change. Several mechanisms can be used to do this, including carbon markets and taxation.
© AFP / D.GANNON - Reduce CO2 emissions! Protesters gather in Berlin in December 2009 to call for tighter regulations.
Why Put a Price on Carbon
Assigning a cost to CO2 emissions, or in everyday speech “putting a price on carbon”, is a way to present the bill to those who are responsible for emissions and who have the ability to bring them down. It is an extension of the "polluter pays" principle adopted in the 1970s for environmental pollution.
In other words, it is about making companies take into account the external costs of their activities. The "external costs" in this case are expenses shouldered by the community as an indirect result of , for example to cover flood and storm damage, loss of harvests and health costs. Putting a price on carbon partly absorbs these costs into the economy and corporate investments.
Instead of imposing regulatory emissions reductions, putting a price on carbon sends a strong message: the biggest polluters can either reduce their emissions, or pay for them. This price signal can also guide consumers in their product choices and behavior.
The implications for industrial operations can be significant: a gas-fired plant becomes more profitable than a -powered plant from $50 per metric ton of CO2, while carbon capture and storage makes financial sense from $80 a metric ton. What’s more, financial penalties stimulate technological and commercial innovation by spawning new processes and industries, and giving rise to new low emission economic growth drivers. The system promotes at a time when rapid urbanization is increasing energy demand in cities. The financial resources generated can be used to help those affected by global warming or to underpin public policy with investments.
How to Put a Price on Carbon
There are a wide array of carbon pricing policies and mechanisms, two of which are most widely used:1
- Carbon markets, under which emissions caps are set for industrial sectors and a quota system is put in place to regulate emissions allowances. At the same time, industries with low emissions are authorized to sell carbon credits to those with high emissions. An exchange is set up for trading, and the price of carbon fluctuates with demand. The emissions cap that has been set (and that can be gradually lowered) is designed to define the level of these quotas.
- Carbon taxes, which can vary depending on whether they are levelled on a company, organization, or consumer, and on the sector (production, , transport, etc). They can be applied at the product level or, more conveniently, when fossil fuel is produced or imported. As a result, a wide variety of taxes exist. Some experts are considering a universal international tax.
The two systems complement each other: in particular, the tax option covers the very large number of small polluters who are difficult to include in quotas.
Even without a specific carbon tax, taxation offers a number of ways to charge for emissions. For example, taxes on petroleum products, which exist to different degrees in many countries, "put a price on" the use of carbon.
In Europe, the regulations on CO2 emissions per kilometer for cars and CO2 per kilowatt hour for producers are reflected in extra costs for consumers. Emerging markets, which subsidize the use of fossil fuels, give carbon a negative or lower price.
Emissions prices can also be influenced by mechanisms that provide incentives to invest in reducing emissions for example through housing renovation, the acquisition of less polluting vehicles or the installation of solar panels. In these cases, financing comes from taxes on other activities.
An Idea that is Catching On
The practice of pricing carbon, introduced by the in 1997, is spreading across the world, and not just through major global multilateral negotiations.
Local authorities, cities, institutions and companies are putting in place local mechanisms in a bottom up approach.