Definition
A market-based approach to reducing greenhouse gas (GHG) emissions by assigning a cost to carbon emissions. Carbon pricing creates financial incentives for businesses and individuals to reduce their carbon footprint by transitioning to low-carbon technologies and practices.
Why It Matters
- Encourages Emissions Reduction: By making carbon-intensive activities more expensive, carbon pricing drives investments in clean energy and efficiency.
- Supports Corporate Decarbonization Strategies: Businesses that proactively reduce emissions can lower operational costs and remain competitive in low-carbon markets.
- Generates Revenue for Climate Action: Many governments reinvest carbon pricing revenue into climate adaptation, clean energy, and just transition programs.
Types of Carbon Pricing
- Carbon Taxes: A direct price on CO₂ emissions, applied per ton of emissions released.
- Cap-and-Trade (Emissions Trading Systems - ETS): Governments set a limit (cap) on total emissions, and companies can trade allowances to meet their emission limits cost-effectively.
- Voluntary Carbon Markets: In voluntary markets, individuals and organizations can purchase carbon credits to offset their emissions. An example is the Thailand Voluntary Emissions Reduction (T-VER) program.
- Internal Carbon Pricing: Internal carbon pricing is used by organizations to assess the financial risks associated with carbon emissions.
How Carbon Pricing Works
- Government Sets a Carbon Price or Cap: Determines the cost of emitting CO₂ or the total allowable emissions.
- Businesses Pay for Emissions: Companies either pay a tax or purchase allowances/credits under a trading system.
- Incentives for Emission Reductions: Firms that invest in low-carbon technologies or energy efficiency can lower their carbon costs.
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