Understanding carbon pricing options

Setting a price on carbon is a powerful mechanism to fight climate change. Consequently, countries, companies, and communities have opened their agendas to implement it. However, carbon pricing cannot be understood as a single and homogeneous tool. It is a set of instruments, each of which can work in specific situations. Knowing this diversity and functionality is the secret to successfully implementing a carbon price system and changing carbon intensive behaviors.

People began to put a price on carbon dioxide emissions in the 1990s, creating notable variants. First, Nordic countries embarked on carbon taxes, and in 1997 the Clean Development Mechanism of the Kyoto protocol established compensation as the basic concept of the market. Carbon price schemes have been evolving from national to international level. Taxes and ETS are implemented through public policies at national or sub-national level (e.g., states). Meanwhile, in the European Union (EU), ETS and Carbon Border Adjustment Mechanism proposal cross national borders as importers will buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU's carbon pricing rules. This phenomenon is now encouraging comparable carbon price systems in countries that export goods and services to Europe.

Today, we can still divide carbon price schemes generally into taxes and Emissions Trading Systems (ETSs) and private carbon markets. The first two are created from public entities to fix a price for each ton of CO2-equivalent emitted. When a government establishes a carbon tax, all emitters included in the scope of the tax have to pay the tax. In an ETS, each emitter has a cap under which they can emit without payment, encouraging entities to maintain the production method under this level. If they exceed their cap, they can buy carbon credits, which generally finance carbon mitigation from another source. Generally, taxes make industries, mainly in the fossil fuel use sector, pay more, discouraging carbon-intensive actions and generating more public funds than an ETS.

Taxes and offsets conceptually interact in an ETS.