Carbon Pricing
Market-Based Carbon Pricing
Market-based carbon pricing provides a flexible alternative to a prescriptive regulation. Putting a cost on emissions incentivizes sustainable practices, technology development, and cleaner investments by businesses. This motivates companies to innovate and surpass emission limits, drives long-term investment in clean technologies, and paves the way for carbon neutrality.
Understanding Carbon Pricing Mechanisms
Market-based carbon pricing offers two main approaches: carbon taxes and emissions trading systems. Both systems incentivize emission reductions across the economy and generate revenue for government initiatives aimed at reducing greenhouse gasses.
How Market-Based Carbon Pricing Works
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Market-based approaches, including carbon taxes and emissions trading systems, directly tie a financial cost to emissions, encouraging reductions.
- Carbon Tax: A straightforward approach where the government places a fee on each ton of CO2 emitted. It could be paid by the producer or the consumer.
- Emissions Trading System (ETS): ETS is a market-based approach that sets a limit on total emissions, allowing companies to purchase and trade emission permits within that cap.
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Combining elements of a carbon tax and ETS, a hybrid approach could offer tailored solutions to meet specific industry and policy needs, maximizing the benefits of both systems.
Cap-and-Trade System
Cap-and-trade sets a supply cap on tradeable carbon emissions credits that would wind down over time. This approach allows for the government to better know and control the greenhouse gas levels entering the atmosphere, with businesses more in control over how they reduce their emissions.
Benefits of Cap-and-Trade
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Cap-and-trade systems provide a limit on greenhouse gas emission in the economy that is certain. This certainty allows policymakers and stakeholders to monitor and adjust to reduction goals over time.
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Historically, cap-and-trade has been deployed more across the globe in complex economies, providing more operational examples of these systems functions.
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With many countries using cap-and-trade, increased opportunities exist for global coordination between systems, driving overall effectiveness.
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Gradual reduction of allowances provides time for hard-to-abate sectors, like cement, to implement achievable wins while investing in long-term emissions reduction strategies.
Principles for Effective Carbon Pricing
Effective carbon pricing allows domestic industries to thrive in a sustainable economy. Here’s how:
- A Carbon Border Adjustment Mechanism (CBAM) levels the playing field, ensuring fair competition by accounting for the carbon footprint of imported goods.
- Revenue from carbon pricing should be reinvested in industrial carbon reduction technologies and sustainable infrastructure, fueling innovation that propels green growth.
- Consistent regulatory policies are necessary to create a clear path to progress, removing barriers to adopting low-carbon technologies.
- We support a lifecycle approach for carbon pricing systems, which means the consideration of the environmental impact of a product from its creation to its disposal, thereby encouraging responsible practices.
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