As policymakers, governments, and environmentalists push to reduce greenhouse gas (GHG) emissions, many are pursuing economic approaches such as carbon pricing alongside their scientific arguments and emotional appeals.

Carbon pricing was first enacted by the European Union in 2005, and the World Bank reports that 57 such initiatives are either implemented or scheduled for implementation worldwide.

What Is Carbon Pricing?

Carbon pricing assigns a value to each ton of carbon dioxide released into the atmosphere. According to the World Bank, about half of the world’s systems price carbon at less than $10 USD per ton. There are three primary approaches:

  • Emissions trading systems (ETS), commonly known as cap-and-trade programs, allow corporations a set amount of GHG emissions annually. Any enterprise that emits a lower amount may sell credits to companies exceeding the cap.
  • Carbon taxes are assessed by governments on GHG emissions.
  • Results-based climate financing (RBCF) is a newer approach proving popular in developing nations. With RBCF, investors or donors supply funds when climate-change mitigation initiatives achieve targeted results.

The varied structures allow officials to design programs that best suit distinct market realities and political appetites. While program details differ between locales, the World Bank notes that ETS programs are the most prevalent.

Europe leads the globe in implementation. Its program was the world’s first and represents over 75% of international carbon trading. In the US, California ‘s cap-and-trade program covers 75% of the state’s GHG emissions from buildings to transportation and imported electricity. On the East Coast, the Regional Greenhouse Gas Initiative applies to emissions from the electric power industry in nine member states, with two more states likely to join in 2020.

Given the challenges developing nations face in accessing capital, many impact investing supporters are heartened by the growth of RBCF programs, which may drive structural changes such as policy implementation and monitoring, reporting, and verification systems.

About half of the world’s systems price carbon at less than $10 USD per ton.

The Purpose of Carbon Pricing

Many see carbon pricing initiatives as fundamental to the Paris Agreement’s goal of limiting global warming. Ideally, an effective carbon pricing initiative promotes the reduction of harmful GHG emissions, gives governments tools to more effectively enforce carbon-related regulations, and assuages investors seeking to quantify carbon risks in financial terms.

Carbon pricing critics believe that these programs underestimate the real-dollar impacts and overstate the societal benefits, especially given the prominent role fossil fuels play in today’s world. Such sentiments bolster the political and public challenges that are the primary headwinds to wide-scale adoption.

Still, meeting Paris Agreement goals requires a multifaceted approach, and assigning an economic value to one of the core factors in global warming has resonated with many.

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