Carbon Pricing

By : Neha Dhyani

Updated : Mar 31, 2022, 8:55

Global warming is at its all-time high, and climate changes are evident, so it is high time to put a price on carbon to safeguard the world from severe environmental impacts. In this regard, several Carbon Pricing standards have been developed and implemented internationally. These standards look promising for achieving sustainable development and a cleaner environment for the generations to come.

Carbon Pricing Meaning

Carbon Pricing is an internationally agreed method for reducing global warming and carbon emissions. It helps to encourage polluting agents like industries and organizations to cut down their consumption of coal, oil, and natural gas by applying a financial incentive on their carbon emissions. These costs specifically include the public's price in terms of increased global warming, climate change, droughts, floods, heatwaves, health care costs, etc.

Once identified, these costs are directed to the sources responsible for carbon emission and levied from them in the form of Carbon Prices. In other words, the government charges Carbon Prices from emitters for their excessive carbon emission. This initiative limits carbon emissions and accelerates the innovation and development of green technologies and sustainable business solutions.

Different government and international standards for charging Carbon Prices from polluting agents are discussed further in the article.

Types of Carbon Pricing

Listed below are some of the common standards used to levy Carbon Prices on the defaulters.

  • Emission Trading System (ETS)

It is a Cap-and-Trade system developed by the government to limit carbon emissions. In this system, the government first puts a cap or a maximum limit on total Greenhouse Gas (GHG) emissions. Then a carbon market is created where the emission rights, such as carbon permits and allowances, can be traded. Notably, the emission rights can be obtained from the government or traded with other firms in the system. The approach is significantly useful in reducing carbon emissions and promoting green innovation.

  • Carbon Tax

It is the direct price associated with GHG emissions. Under this system, a fixed price is levied from the emitters for every ton of carbon emitted. This taxation acts as a motivator to reduce carbon emissions and innovate cleaner fuels and technologies for sustainable development.

  • Carbon Offset

Under the offsetting mechanism, the carbon emitters invest and fund green projects or emission saving projects to compensate for the carbon emissions. In this system, carbon credits are issued to the emitters that can be used in emission-saving projects nationally and internationally. The offsetting balances carbon footprints and helps achieve the goals of carbon neutrality.

  • Result Based Climate Finance (RBCF)

It is a funding system associated with Carbon Pricing in which organizations receive payments when they succeed to achieve the pre-defined climate change outcomes, such as emission reductions. This system requires a verifier that ascertains that the set goals have been achieved. This mechanism is substantively helpful in keeping carbon pollution in control.

  • Internal Carbon Pricing

It is a decarbonization effort undertaken internally by the public and private agencies. Under this Carbon Pricing strategy, the organization assigns a fixed price to its carbon usage. This strategy aims to reduce carbon emissions and promote innovation in sustainable technologies by fixing an internal threshold for carbon emission.

  • International Emission Trading (IET)

An international ETS facilitates Annex I countries to achieve carbon reductions at the least cost.

  • Joint Implementation (JI) and Clean Development Mechanism (CDM)

These are international offset mechanisms developed under the Kyoto Protocol, enabling Annex I countries to invest in clean energy projects in return for credit.

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FAQs on Carbon Pricing

Q.1. What is Carbon Pricing?

Carbon Pricing is the monetary compensation from carbon emitters for excessive carbon emissions.

Q.2. What is another name for Emission Trading System in Carbon Pricing?

Emission Trading System or ETS in Carbon Pricing is also known as the Cap-and-Trade System.

Q.3. What is the full form of Carbon Pricing standard RBCF?

The full form of Carbon Pricing standard RBCF is Result Based Climate Finance.

Q.4. Name the International Carbon Pricing Standards.

Following are the International Carbon Pricing Standards:

  • International Emission Trading
  • Joint Implementation
  • Clean Development Mechanism