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.


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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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.  Both can work to reduce emissions. Cap and trade will assure that we reach our emissions target, which is a key objective […]

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Emission Sources Included

Ideally, to control carbon emission using a price on carbon, all emission sources should be included. Emission Sources The primary emission sources in the U.S. in 2016 as plotted by the EPA are shown in the illustration on the right. The three primary sources are electricity generation, transportation and industrial. Buildings, which account for a […]

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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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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 […]

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Cap and Trade

Following the  Kyoto Protocol , Energy Trading Systems (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. As of 2019 there is a form of Energy Trading System in over 50 jurisdictions, with more being developed. In cap and trade, a […]

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