![]() ![]() Rather than regulating exactly where and how emissions should be reduced, carbon pricing gives markets the flexibility to find the cheapest ways to lower emissions. That’s because carbon pricing can touch every part of the economy, from electricity to manufacturing to transportation, and because it rewards any behavior that reduces greenhouse gas emissions. Many economists and policymakers consider carbon pricing one of the best available tools to combat climate change. The revenue can be used for other purposes as well, such as investing in low-carbon technologies or infrastructure or training workers for green jobs. That revenue can be given back to taxpayers, especially low-income taxpayers, to help them pay for energy and other goods, which usually become more expensive as a result of the carbon price. Both approaches can also raise revenue for the government, through taxes or through the auction in a cap-and-trade system. The resulting carbon price then depends on the supply and demand for permits.īoth approaches give emitters strong incentives to invest in reducing their emissions, either to lower their tax bills, or to lower the cost of buying permits. Permits can be traded, so emitters who can’t cost-effectively lower their emissions must buy extra permits from emitters who can. For each ton of emissions released, the emitter must have a permit. Then the government issues a limited number of emissions permits, either by giving them away freely to emitters, or through an auction. A cap-and-trade system (or emissions trading system) sets the total amount of emissions that can be released.The resulting fall in emissions then depends on how much emitters change their behavior in response to the tax. A carbon tax directly sets a price per ton of emissions. ![]() There are two main approaches to carbon pricing: a carbon tax and a cap-and-trade system. However, that price is very hard to determine, so often carbon prices are instead set at levels that policymakers think will help them meet certain emission or temperature targets. In theory, a carbon price should be equal to the “social cost of carbon.” For example, if one ton of CO 2 emissions costs the public $100, it should cost $100 to emit that ton of CO 2. When producers and consumers have to pay for each ton of CO 2 they emit, they have an economic incentive to shift away from fossil fuels, improve their energy efficiency, and invest in low-carbon technology. The goal of carbon pricing is to shift the responsibility for these costs to those who produce the emissions. These emissions are the main cause of climate change, resulting in flooding, sea level rise, drought, heatwaves, and other costs to society.Ĭurrently, the public bears the costs of these impacts. Emissions are produced when fossil fuels are burned to do things like make electricity, fuel vehicles, make materials and products, and heat and cool homes. Carbon pricing is a policy tool to lower emissions of carbon dioxide (CO 2) and other greenhouse gases. ![]()
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