Carbon price

The carbon price is the cost applied to greenhouse gas emissions. It aims to reduce global warming through either emissions trading systems or carbon taxes and fees. Carbon pricing schemes provide incentives to corporations and countries to reduce their energy use and shift to cleaner fuels. The carbon price considers the costs of emissions that the public must pay, such as damage to crops, healthcare costs from heatwaves and droughts, and loss of property from flooding and sea level rise. These costs are then tied back to their sources, usually as a price on carbon dioxide emissions. This helps shift the burden of greenhouse gas emissions to those who produce them. Companies and governments can either change their activities to lower their emissions or continue regular activity at a higher cost. Many governments and businesses agree that carbon pricing is an important factor in transitioning to an economy that is less dependent on carbon.

Background

Greenhouse gases such as carbon dioxide are produced when fossil fuels—coal, natural gas, and oil—are burned to power vehicles, generate electricity for manufacturing, and heat homes. Greenhouse gases are the main driver of global climate change. When carbon dioxide and other pollutants reach the atmosphere, they absorb sunlight and solar radiation. They are like a greenhouse, which is why they are called greenhouse gases.

A greenhouse is a building with glass walls and a glass roof. It is used to grow plants. Greenhouses stay warm inside, even during the winter. This is because the glass walls trap the sun’s heat. Gases such as carbon dioxide also trap heat. At night, when the temperature drops, greenhouse gases trap heat in the atmosphere, making Earth warmer. This is called global warming. Other pollutants that can cause the greenhouse effect include methane, nitrous oxide, water vapor, and synthetic fluorinated gas.

Global warming causes climate change. An area’s climate is its weather over a long period of time. Climate change has devastating effects across the globe including flooding, sea level rise, droughts, and heatwaves. For example, in 2015, California suffered a catastrophic and lengthy drought. It caused the state’s worst water shortage in 1,200 years. Scientists said that water shortages were intensified by 15-20 percent due to global warming. Droughts make the ground dry enough to spark wildfires.

Global warming is also causing sea ice to melt during the summer in the Arctic. Polar bears depend on this ice for traveling, resting, and hunting. Many have died because the ice melted, and they cannot get from place to place. Seals, their main prey, also depend on sea ice. It is where they raise their young. The seas are also rising because of global warming. Glaciers are huge chunks of ice on land. When they melt, the water runs into the seas, contributing to global sea-level rise.

Warmer oceans are also intensifying tropical storms. For example, scientists have found that the frequency of North Atlantic hurricanes has increased since the 1980s. At the same time, the number of Category 4 and 5 storms has increased. The 2020 Atlantic hurricane season saw a record-breaking thirty tropical storms, six major hurricanes, and seven additional hurricanes. With this increase in frequency and intensity of storms came increased property damage and death. For example, in 2017, Hurricanes Harvey, Irma, and Maria caused almost three hundred billion dollars in damage and more than three thousand fatalities in the United States. This storm activity is becoming more common as well. The 2021 and 2023 seasons were also above average.

The dangers of global warming affect the entire planet, accounting for tens of thousands of deaths. Each year, as global climate change intensifies, the consequences become more devastating. Scientists believe that more than 250,000 people throughout the world could die each year if greenhouse gases are not reduced. Another one hundred million people will be forced into poverty by 2030. People such as farmers may find it difficult to grow crops. This will make food more expensive. Homes and businesses will be destroyed by powerful storms, leaving people without shelter and jobs. Those who are already marginalized will be thrust into poverty.

Curbing global climate change requires serious cuts in greenhouse gas emissions and the use of alternative fuels. Many countries across the globe have committed to this by signing the 2015 Paris Climate Agreement, which aims to lower emissions. The countries have agreed to meet an ambitious goal: to keep the rise in global temperature below 35.6 degrees Fahrenheit (2 degrees Celsius) and strive for 34.7 degrees Fahrenheit (1.5 degrees Celsius). Countries need to take many measures to do this, such as encouraging people to drive electric cars and heat their homes with solar energy. In 2017, President Donald Trump withdrew the United States from the Paris Climate Agreement, but President Joe Biden reversed this decision in 2021.

Overview

Carbon pricing by a cap-and-trade system is one way to address global warming and lower greenhouse gas emissions. With a cap-and-trade system, the government sets a goal for the amount of emissions a company can produce—a cap. If they stay under this cap, they are rewarded in some way. They are sometimes given credits for reaching their goals. Companies that surpass the cap are taxed, while those that reduce their emissions enough to stay under the cap may sell or trade their unused credits. A cap-and-trade system is meant to be an incentive for industries to combat global warming and climate change. Critics of the system believe the caps are set too high. If companies do not think they can stay under the caps, they will not participate in the program.

Carbon pricing initiatives also aim to shift the responsibility of carbon costs from individuals to those who produce these emissions, such as factories and automobile manufacturers. Persuading businesses to act more significantly helps the environment. One way to do this is with a carbon tax system; emitters are charged a set price per ton of emissions. Any reduction in overall carbon emissions depends on how much emitters change their behavior in response to the tax.

Therefore, the carbon price depends on the supply and demand of emissions permits. The choice of which system to use depends on national and economic circumstances. There are also other more indirect ways to price carbon, such as fuel taxes, the removal of fossil fuel subsidies, and regulations that incorporate the social cost of carbon. Carbon prices are hard to determine, and often, policymakers set prices at levels that they think will help them meet certain emissions or temperature targets.

Carbon trading can take place within a country or between different countries. The Kyoto Protocol was adopted in December 1997 and officially went into force in February 2005. It agreed to create a world carbon dioxide emissions market. Many countries committed to emissions targets under the Kyoto Protocol, and the allowed emissions are divided within assigned amount units (AAUs). If a country surpasses its target, it can buy units from another country that has units to spare. One hundred and ninety-two have adopted the Kyoto Protocol.

Individual US states have also implemented their own systems. For instance, California has its own cap-and-trade program, which was launched in January 2013. It covers electricity generators, large industrial facilities, and distributors of transportation, natural gas, and other fuels. In 2014, California’s program linked with Quebec, Canada’s program. In November 2014, the state announced that the program had achieved 100 percent compliance. The state of Vermont also initiated its own climate change program in December 2022. It is called the Climate Action Plan. According to the plan, Vermont will reduce greenhouse gases from industries such as transportation, construction, industrial, commercial, and agriculture. It will limit the use of chemicals, substances, and products that contribute to climate change. It will also encourage smart growth and reduce energy burdens for rural and marginalized communities. By 2050, all industries in Vermont will have net zero emissions. As of 2025, forty-eight states and the District of Columbia had initiated either a state climate action plan or a Priority Climate Action Plan (PCAP) under the Environmental Protection Agency's (EPA's) Climate Pollution Reduction Grants program, or both.

Many economists and policymakers assert that carbon pricing is one of the best ways to address climate change because it rewards behavior that reduces greenhouse gas emissions. It also touches on every part of the economy, including electricity, manufacturing, and transportation. Carbon pricing also gives markets the flexibility to find the most cost-effective ways to reduce emissions. Another advantage of carbon pricing systems is that both cap-and-trade and taxes raise revenue for the government. This money can then be returned to taxpayers, especially low-income people, to help them pay for energy and other goods that may become more expensive due to higher carbon prices. These funds can also be invested in other areas, such as low-carbon technologies and training workers for green jobs.

Bibliography

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“Emissions Trading.” United Nations Climate Change, unfccc.int/process/the-kyoto-protocol/mechanisms/emissions-trading. Accessed 12 Jan. 2025.

“45 States, Large Metro Areas Submit Climate Action Plans under President Biden’s Inflation Reduction Act.” United States Environmental Protection Agency, 11 Mar. 2024, www.epa.gov/newsreleases/45-states-large-metro-areas-submit-climate-action-plans-under-president-bidens. Accessed 12 Jan. 2025.

“Overview of ARB Emissions Trading Program.” California Environmental Protection Agency, 9 Feb. 2015, ww2.arb.ca.gov/sites/default/files/cap-and-trade/guidance/cap‗trade‗overview.pdf. Accessed 12 Jan. 2025.

“What is Carbon Pricing.” World Bank Group, www.worldbank.org/en/programs/pricing-carbon. Accessed 12 Jan. 2025.

“What Is the Kyoto Protocol?” United Nations Climate Change, unfccc.int/kyoto‗protocol. Accessed 12 Jan. 2025.