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Introduction to Carbon Pricing
Carbon Dioxide (CO2) is one of the greenhouse gases (GHGs) believed to be responsible for the warming up of our planet. Other GHGs that are also carbon based are: Methane (CH4); Hydrofluorocarbons (HFCs); and Perfluorocarbons (PFCs). These gases are released to the environment (causing pollution) through the burning of carbon-based fossil fuels (coal, oil, natural gas, shale oil/gas and oil sands). Fossil fuels are burned to power tranportation and industrial activities.
Pollution comes at a price. The price is the damages it causes to the environment. Carbon pricing is a mechanism that places price on carbon to correct the negative impact of the pollution to t. It allots price to every tonne of carbon pollution generated by a company or any organization for that matter. The total cost of production is the actual cost of production plus the environmental cost.
Total Cost = Actual cost + Carbon (or Environmental Pollution) Cost
The carbon cost is normally passed on to the consumer as the producer increases the sale price to get back the carbon cost. However, a producer needs to lower the carbon cost so as to reduce the sale price and remain competitive. To lower the carbon cost, the producer must reduce carbon pollution. Subsequently, carbon pricing is an instrument that could potentially be used to control the manner and the quantity of carbon pollution generated by organizations.
There are two (2) forms of Carbon Pricing - Carbon Tax and Cap and Trade.
Carbon tax is a form of levy charged companies/organizations generating carbon pollution through fossil fuel consumption. It is a direct cost on carbon emissions. Companies or organizations are charged certain amount of money per tonne of carbon pollution generated.
Carbon tax has a couple of benefits. Carbon tax provides revenue for the government; the revenue could be used to drive energy efficiency and environmental friendly projects. Carbon tax could lead to decline in carbon emissions as fossil fuel consumers reduce consumption due to increased fuel costs as a result of the carbon tax. Producers, in order to reduce carbon tax, become more energy efficient and innovative.
Cap and Trade
Cap and trade system allows each entity (company, organization or country) to purchase some pre-assigned credits to pollute. Companies that use up their credits (i.e. reach their cap or pollution limit) can purchase additional credits from others that have not reached their limits. Another name that has been used to describe cap and trade is emissions trading
Similar to carbon tax, cap and trade reduces emissions, drive energy efficiency and provide government revenue that could be used to carry out environmentally friendly projects.
References and other related internal links:
Pricing Carbon - The World Bank
Pricing Carbon Emissions - David Suzuki