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Industrial Smoke

What does it mean to put a price on carbon?


 Written By: Derek Martin

Published: September 19, 2020 

The Climate Crisis has been in the news a lot this year: devastating wildfires the size of Connecticut in the West, so many hurricanes in the Caribbean that we’re running out of selected names, and a glacier twice the size of Manhattan breaking away from the Arctic ice shelf. Fire, wind, and water, at first glance seem to be completely unrelated, but in reality are all connected and exacerbated by carbon dioxide emissions.

This article isn’t meant to re-hash the climate science behind the climate crisis. There’s so much already written about that, and I encourage you to read the Intergovernmental Panel on Climate Change’s 5th Assessment Report if you want to learn more about the specifics of climate change. Instead, we’re going to discuss one of the many options to dealing with the climate crisis. There is a growing movement to use market-based solutions to reduce our carbon emissions known as “putting a price on carbon.”

What does putting a price on carbon really mean? In the most basic terms, putting a price on carbon means that companies who produce carbon dioxide are required to pay for the carbon dioxide they emit into the atmosphere. The concept is simple enough, but the rest of this article will delve into what this would mean in practice, how it would be done, and the opinions of both proponents and critics.

To begin, let’s discuss why we should put a price on carbon dioxide? The sad fact is that those who pollute, whether that’s pollution emitted into the atmosphere, dumped into the soil, or pumped into our water system, rarely pay for all the negative impacts of their actions. The government, taxpayers, and non-governmental organizations(NGOs) constantly foot the bill for environmental clean-up efforts. Instead, everyday individuals and health insurance companies are forced to pay for healthcare costs related to illnesses caused by pollution, and insurance companies pay for damage that occurs from natural disasters which are getting stronger and more frequent due to climate change.

We can see that carbon emissions are creating costs not being covered by the few who are causing and benefitting from those emissions. How much should emitters be charged for their emissions? Trying to calculate the exact dollar amount of damage caused by carbon dioxide emissions is both challenging and controversial. We can see this in the wide range carbon prices that have been observed already in practice from $1/ton of carbon dioxide equivalent (tCO2e) to $140/tCO2e. The Carbon Pricing Leadership Coalition reports a price between $40 - $80/tCO2e to meet the 2015 Paris Agreement’s climate goals.

There are two main mechanisms to put a price on carbon; a carbon tax and an emissions trading system. A carbon tax puts a direct cost on the emissions of carbon as a price per ton of CO2e emitted. It is typically calculated based on the carbon content of the fossil fuel and charging those who use that fossil fuel. Carbon reductions are achieved by the basic economic principle that as a price of a good rises, demand for it falls. As this is driven by demand, there is no defined carbon reduction outcome.

On the other hand, an emissions trading system creates a system where emitters meet emissions targets by trading available emission units. There are two main ways to enact an emissions trading system: cap and trade or a baseline-and-credit system. Cap and trade creates a ceiling to the total emissions that are allowed and create a corresponding amount of emissions allowances. Those allowances are distributed and entities can only emit carbon dioxide up to the amount of allowances they have. Entities can sell their allowances to others which encourages efficiency. A baseline-and-credit system is similar but creates a baseline emissions level for each entity and efficient performance creates credits from emitting less than the baseline which the entity can then sell. Both of these create a defined carbon reduction outcome.

Proponents of carbon pricing argue that putting a price on carbon and using that data in business decisions integrates climate crisis related issues into the market economy, essentially tying business activities to environmental impacts. They argue that businesses are responsive to costs and a more inclusive cost of business will incentive businesses to examine their performance and become more efficient. They also argue that these schemes will increase funding for climate change mitigation and adaptation efforts. Critics argue the complexity of calculating the actual price of carbon, concerns about governmental intervention, political feasibility to implement, negative impacts on business, and negative impacts on lower income populations. On that last point, proponents counter that funds raised can be returned to lower social economic populations through yearly dividends or tax rebates.

The climate crisis is constantly in flux and we have a wide portfolio of options at our disposal right now to significantly address this crisis. Putting a price on carbon is one of many governmental interventions, technological improvements, individual behavior changes, and sustainable business practices that should be implemented. If you’re interested in learning more about what is being done to put a price on carbon or getting involved, check out Citizen’s Climate Lobby, a non-partisan grassroots advocacy organization that lobbies congress to create nationwide legislation to put a price on carbon.

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