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Putting a Price on Carbon

Updated: Jun 14, 2023

Who is paying the real price for carbon emissions?

Putting a Price on Carbon illustration
Popping carbon tags by Odelia Vaz


The War on Carbon

Today, it is unanimous: humans are driving the earth towards a climate crisis. When faced with global warming due to extensive fossil fuel burning, the international community’s response was to declare an objective of limiting warming to 2˚C above pre-industrial levels. We see pledges to reduce emissions and achieve net zero as soon as possible, but for this response to work, carefully crafted policies that address our carbon issue must be put into place. We already know that the emission of carbon is highly disparate - China and the US alone emit almost 45% of the world’s carbon, which is why it is of utmost importance that the issue is addressed at the root level; that is, reducing the carbon emissions themselves. This is where carbon pricing comes in. According to the world bank, carbon pricing “refers to initiatives that put an explicit price on GHG emissions.” Pricing is an instrument used by the government to capture the costs of greenhouse gas emissions and tie them back to their sources through a price. Thus, instead of trying to dictate the number of emissions each country is liable to, a price on carbon lets us shift the burden onto those who are responsible for the emissions and gives them a choice of either avoiding it by emitting less or paying for their emissions.



Weapons in the Arsenal

Carbon pricing can take many forms, but currently, Carbon Taxing is the one most talked about. Under carbon taxing, the government directly sets a price on carbon, i.e the price that emitters pay for each ton of greenhouse gas emitted. This works because companies start limiting their emissions by switching to renewables so as to limit the amount they have to pay. Carbon taxes also increase the prices of goods such as gasoline, motivating consumers to conserve and become energy efficient or switch to clean energy. Another carbon pricing system is the Emissions Trading System (ETS) which usually includes cap and trade systems and baseline credit systems. In ETS, emitters have to comply with a set emission target set by their government either by reducing GHG or trading emission units. Cap systems have an absolute limit on emissions whereas baseline systems have a defined level and companies reducing their emissions below the level receive credits. Other than this, there are Offset Mechanisms that issue carbon credits on a project-to-project basis, Results Based Climate Finance (RBCF) where funds are issued only after predefined conditions like emission level reductions are achieved, and Internal Carbon Pricing which organisations implement to reduce climate change impacts of their own volition.


Uphill Battle

As of 2021, 35 Carbon Pricing programs have been implemented across the world:

State and Trends of Carbon Pricing 2021, World Bank 2021.

According to the IMF, “[j]ust three countries—China, India, and the United States—account for about 80 percent of the low-cost mitigation opportunities across G20 countries.” Carbon pricing initiatives among these countries would be a great boost in the fight against climate change, but considering that the US is still grappling with the Green New Deal, the fact that researchers claim China’s new nationwide emission trading system is not good enough, and India’s debacle with coal at the COP26, it is maintained that we are not being ambitious enough. Moreover, simply implementing a carbon tax doesn’t solve our problems – making fossil fuels expensive disproportionately impacts the poor, because they then have to sacrifice a higher percentage of their income for necessities if they are unable to switch to cleaner energy. Thus, any carbon pricing initiatives must utilise a full range of approaches, be well thought out, and be gradually implemented in phases.



References

Amadeo, K. (2022, March 13). What is Carbon Pricing? | Carbon Pricing Dashboard. Thebalance.Com.


Parry, I. (2019). The Case for Carbon Taxation – IMF F&D | DECEMBER 2019. Imf.Org.




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