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Carbon price
Carbon pricing (or CO2 pricing) is a method for governments to mitigate climate change, in which a monetary cost is applied to greenhouse gas emissions. This is done to encourage polluters to reduce fossil fuel combustion, the main driver of climate change. A carbon price usually takes the form of a carbon tax, or an emissions trading scheme (ETS) that requires firms to purchase allowances to emit. The method is widely agreed to be an efficient policy for reducing greenhouse gas emissions. Carbon pricing seeks to address the economic problem that emissions of CO2 and other greenhouse gases are a negative externality – a detrimental product that is not charged for by any market.
28% of global GHG emissions are covered by carbon pricing in 2025. In 2021, there was a major increase in the usage of carbon pricing due to the introduction of the Chinese national carbon trading scheme. Regions with carbon pricing include most European countries and Canada. On the other hand, top emitters like India, Russia, the Gulf states and many US states have not introduced carbon pricing. Australia had a carbon pricing scheme from 2012 to 2014. In 2020, carbon pricing generated $53B in revenue.
According to the Intergovernmental Panel on Climate Change, a price level of $135–$5500 in 2030 and $245–$13,000 per metric ton CO2 in 2050 would be needed to drive carbon emissions to stay below the 1.5°C limit. Latest models of the social cost of carbon calculate a damage of more than $300 per ton of CO2 as a result of economy feedbacks and falling global GDP growth rates, while policy recommendations range from about $50 to $200. Many carbon pricing schemes including the ETS in China remain below $10 per ton of CO2. One exception is the European Union Emissions Trading System (EU-ETS) which exceeded €100 ($108) per ton of CO2 in February 2023.
A carbon tax is generally favoured on economic grounds for its simplicity and stability, while cap-and-trade theoretically offers the possibility to limit allowances to the remaining carbon budget. Current implementations are only designed to meet certain reduction targets.
As a supplement to carbon pricing enforced externally by national and subnational governments, organizations can also voluntarily implement their own internal carbon price (ICP) through a variety of tools. These include emissions trading systems, proxy prices, carbon fees, implicit prices, and hybrid models. Organizations have used a variety of metrics to define their carbon prices. Research on the impacts of ICP on institutional emissions and competition is ongoing.
Carbon pricing is considered by many economists to be the most economically efficient way to reduce emissions, taking into account the costs of both efficiency measures and the inconvenience of lesser fossil fuels. By pricing the externalities of carbon emissions, efficiency comes about by eliminating the market failure of the unpriced external costs of carbon emissions at its source. It is regarded as more efficient than renewable energy subsidies given to individual firms,[citation needed] because the difficulties of determining the value of emissions to each firm makes command and control regulation less likely to be efficient.
In a carbon tax model, a tax is imposed on carbon emissions produced by a firm. In a cap-and-trade design, the government establishes an emissions cap and allocates to firms emission allowances, which can thereafter be privately traded. Emitters without the required allowances face a penalty more than the price of permits. Assuming all else is equal, the market for permits will automatically adjust the carbon price to a level that ensures that the cap is met. The EU ETS uses this method. In practice, it has resulted in a fairly strong carbon price from 2005 to 2009, but that was later undermined by an oversupply and the Great Recession. Recent policy changes have led to a steep increase of the carbon price since 2018, exceeding 100€ ($118) per ton of CO2 in February 2023.
Evaluations of 21 carbon pricing schemes, show that at least 17 of these have caused reductions in greenhouse gas emissions. The achieved emissions reductions range between 5% and 21% for the studied schemes.
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Carbon price
Carbon pricing (or CO2 pricing) is a method for governments to mitigate climate change, in which a monetary cost is applied to greenhouse gas emissions. This is done to encourage polluters to reduce fossil fuel combustion, the main driver of climate change. A carbon price usually takes the form of a carbon tax, or an emissions trading scheme (ETS) that requires firms to purchase allowances to emit. The method is widely agreed to be an efficient policy for reducing greenhouse gas emissions. Carbon pricing seeks to address the economic problem that emissions of CO2 and other greenhouse gases are a negative externality – a detrimental product that is not charged for by any market.
28% of global GHG emissions are covered by carbon pricing in 2025. In 2021, there was a major increase in the usage of carbon pricing due to the introduction of the Chinese national carbon trading scheme. Regions with carbon pricing include most European countries and Canada. On the other hand, top emitters like India, Russia, the Gulf states and many US states have not introduced carbon pricing. Australia had a carbon pricing scheme from 2012 to 2014. In 2020, carbon pricing generated $53B in revenue.
According to the Intergovernmental Panel on Climate Change, a price level of $135–$5500 in 2030 and $245–$13,000 per metric ton CO2 in 2050 would be needed to drive carbon emissions to stay below the 1.5°C limit. Latest models of the social cost of carbon calculate a damage of more than $300 per ton of CO2 as a result of economy feedbacks and falling global GDP growth rates, while policy recommendations range from about $50 to $200. Many carbon pricing schemes including the ETS in China remain below $10 per ton of CO2. One exception is the European Union Emissions Trading System (EU-ETS) which exceeded €100 ($108) per ton of CO2 in February 2023.
A carbon tax is generally favoured on economic grounds for its simplicity and stability, while cap-and-trade theoretically offers the possibility to limit allowances to the remaining carbon budget. Current implementations are only designed to meet certain reduction targets.
As a supplement to carbon pricing enforced externally by national and subnational governments, organizations can also voluntarily implement their own internal carbon price (ICP) through a variety of tools. These include emissions trading systems, proxy prices, carbon fees, implicit prices, and hybrid models. Organizations have used a variety of metrics to define their carbon prices. Research on the impacts of ICP on institutional emissions and competition is ongoing.
Carbon pricing is considered by many economists to be the most economically efficient way to reduce emissions, taking into account the costs of both efficiency measures and the inconvenience of lesser fossil fuels. By pricing the externalities of carbon emissions, efficiency comes about by eliminating the market failure of the unpriced external costs of carbon emissions at its source. It is regarded as more efficient than renewable energy subsidies given to individual firms,[citation needed] because the difficulties of determining the value of emissions to each firm makes command and control regulation less likely to be efficient.
In a carbon tax model, a tax is imposed on carbon emissions produced by a firm. In a cap-and-trade design, the government establishes an emissions cap and allocates to firms emission allowances, which can thereafter be privately traded. Emitters without the required allowances face a penalty more than the price of permits. Assuming all else is equal, the market for permits will automatically adjust the carbon price to a level that ensures that the cap is met. The EU ETS uses this method. In practice, it has resulted in a fairly strong carbon price from 2005 to 2009, but that was later undermined by an oversupply and the Great Recession. Recent policy changes have led to a steep increase of the carbon price since 2018, exceeding 100€ ($118) per ton of CO2 in February 2023.
Evaluations of 21 carbon pricing schemes, show that at least 17 of these have caused reductions in greenhouse gas emissions. The achieved emissions reductions range between 5% and 21% for the studied schemes.
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