Pricing Mechanisms

CaT vs CT table

Putting a price on carbon emissions can be done by principally two methods:  Cap and Trade and Carbon Tax.   The essential difference between the two methods is where the government control is set and where the market control is set, as shown in the table. Hybrid models using elements of either are also possible.

There are three primary elements to any pricing scheme:  1) the pricing mechanism (cap and trade or carbon tax), 2) the emission sources included, and 3) how the revenue is used.  Carbon pricing is growing both in use and support.

 


Carbon Pricing

“Carbon pricing” can have different meanings.  Explicit carbon pricing puts a price directly on carbon emissions, like carbon tax and cap and trade.  Implicit pricing includes policies or instruments that effectively price carbon, such as gasoline taxes. Negative carbon pricing includes subsidies or support for fossil fuel production or use which lead to emissions of carbon dioxide. Explicit […]

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Emission Sources Included

Ideally, to control carbon emission using a price on carbon, all emission sources should be included.  The primary emission sources in the U.S. in 2012 as plotted by the EPA are shown in the illustration on the right. Click on figure to enlarge. The three primary sources are electricity generation, transportation and industrial.  Some pricing […]

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Cap and Trade

Following the  Kyoto Protocol , Energy Trading Schemes (ETS) — also called cap and trade — emerged as the primary method to put a price on carbon. The first was in the European Union, launched in 2005. There is now a form of Energy Trading Scheme in nineteen regions or countries, with more being developed. In cap and trade, a cap of carbon emissions is […]

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Carbon Tax

Like it sounds, a carbon tax is a price on carbon emissions set by the government.  It can start low and ramp up with time.  With a carbon tax, emissions would be a cost to a business, and those business would attempt to minimize those costs, thereby causing a decline in emissions coincident with that cost […]

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Carbon Tax vs. Cap and Trade

Much has been written debating which is “better” — carbon tax or cap and trade.  The essential difference is simply whether government controls the price or the level of emissions as shown in the simple table.   Cap and trade will assure that we reach our emissions target, which is a key objective to limit climate […]

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What is the “Right” Price?

We know that GHG emissions are causing damage.  If we can estimate how much carbon emissions actually cost – often called the Social Cost of Carbon (SCC) – it will help guide us to the “right” price.  But those cost estimates range widely — from US$10/tCO2e to over US$400/tCO2e. A FEMA study estimates that 1 […]

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