Why a Worldwide Carbon Price is needed?

The price we pay for most of the services we receive and most of the goods we use do not reflect the cost of carbon emissions caused by making, distributing or consuming them. Carbon pricing solve this problem adding to services and goods a price for their contribution to greenhouse gas emissions.

Many governments and experts around the world agree that carbon pricing is the simplest and best way to help slash greenhouse gas emissions.

Main different options
for carbon pricing

Carbon pricing can be implemented using two main options. Both options have already been experimented and are able to push companies to cut their emissions and citizens to change their behaviors and redirect them towards lower emission actions.

Adding a carbon price
to goods and services

everyone pays an extra price on services and goods, proportional to the greenhouse gas emission from fossil fuel generated by making, distributing or consuming them.

Cap & Trade Mechanism or
Emission Trading System (ETS)

A government or a region/district put in place an emission cap mechanism allowing companies (differentiated by dimensions and sectors) to emit up to a threshold. Companies can then buy credits to emit more or sell their unused credits.

Carbon Price

Pros

  • tax systems are well known and all countries use taxes;
  • implementation of carbon price is very simple;
  • it would provide consistent and stable price signals and a growth curve that would favor emission reduction policies to avoid cost increase for the CHG emissions;
  • revenues go to governments.

Cons

  • quantity of emissions is uncertain under a carbon price mechanism

ETS

Pros

  • quantity of emissions is certain so the GHG reduction curve can be better controlled

Cons

  • limited international experience with cap &trade mechanism;
  • more complex to be implemented and regulated due to the involvement of many external;
  • the price of carbon would highly fluctuate giving inconsistent signals to private sector decision makers.
  • not do not go to governments when emission permits are allocated for free to make the mechanism more acceptable (most of the cases).

Conclusion

Both systems have pros and cons but both systems can work and contribute to GHG emission reduction. They could also coexist with a reasonable mix. This could be for example the case of EU where a ETS system is already in place and this mechanism could be supported by a carbon price system on goods and services not covered by the ETS. But, having to decide between the two systems, we would opt for the carbon price system for its simplicity, transparency, predictability and secure revenues.

How to invest revenues from carbon pricing?

The best way to invest revenues produced by carbon price policies is to support low carbon activities:
  • 1
    Research and innovation for low carbon technologies

  • 2
    Cutting taxes or giving incentives to new jobs and investments in the green economy

    (energy efficiency, renewable energy production, circular economy, protection of the environment)

  • 3
    Support poor countries for the transition to a low carbon society

  • 4
    Support lower incomes by reducing taxation or giving discounts on goods and services in order to reduce the level of inequality