Carbon pricing refers to determining how much carbon dioxide producers must pay for the right to emit a certain amount.
Carbon pricing refers to the method of determining how much carbon dioxide producers must pay for the right to emit a certain amount. This is a feature of different regulatory plans designed to reduce carbon emissions, since carbon dioxide contributes to climate change. In schemes involving a carbon tax, carbon pricing means deciding what amount of tax would significantly reduce emissions without unduly harming the industry or the economy. It’s also a feature of some cap-and-trade plans, in which companies can purchase the right to emit more carbon dioxide by buying the credits that allow them to do so. The price of carbon dioxide is usually given as the price per metric ton.
There are several proposed ways to implement carbon pricing through a cap-and-trade or tax system. A cap-and-trade plan might initially include auctioning off allowances, simply distributing them, or involve a combination of both. The taxation can be a direct price per tonne or be part of a hybrid plan that includes a cap and a negotiation form. Some businessmen see pure taxes as a penalty, while some economists argue that it provides more incentive to reduce pollution. One possible advantage of cap and trade is that it could encourage innovation in reducing emissions, rather than encouraging industries to cut economic output.
The carbon price discussion also deals with two economic factors, one known as direct cost and the other as externality. A direct cost is a cost that is normally included in the calculation of income and expenses, such as the purchase of equipment or the cost of labor. An externality, also known as an indirect cost, is usually not taken into account, but it still has a broader economic impact. Due to the negative effects of climate change, carbon emissions have the potential to produce a number of harmful externalities. Carbon pricing is seen as a way to reduce and possibly offset these externalities.
There are practical problems when it comes to determining a price for carbon. One problem is that it is difficult to determine the true cost of any externality before it occurs. On the other hand, first determining the value of nearby natural resources, such as lakes or forests, is a standard part of the development process for a specific area. Another question is to what extent the price of carbon can or should be passed on to consumers and how this will affect the economy. Some also fear that products that go through multiple stages of development before becoming a finished product could become prohibitively expensive.