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Carbon Pricing

2023 OCT 17

Preliminary   > Environment and Ecology   >   Global warming   >   Climate change

Why in news?

  • Government of India is in the process of framing a carbon pricing mechanism and development of an active carbon market.

About Carbon Pricing

  • Carbon pricing is a strategy used to reduce carbon emissions by putting a price on carbon pollution. There are several methods for implementing carbon pricing.

Different approaches

  • Carbon Tax: A carbon tax is a fee imposed on the carbon content of fossil fuels. It puts a price on each unit of greenhouse gas emissions. Companies or individuals pay a set amount for each ton of carbon dioxide or equivalent emissions they release. The tax can be designed to increase over time, providing an economic incentive to reduce emissions. Examples include the carbon tax in British Columbia, Canada, and the carbon levy in Sweden.
  • Cap-and-Trade (Emissions Trading System): Cap-and-trade systems set a limit (cap) on the total allowable emissions and create tradable permits, or allowances, that add up to the cap. Companies must hold enough allowances to cover their emissions. If they emit less, they can sell surplus allowances; if they emit more, they must buy additional allowances. This system creates a market for carbon allowances, promoting emission reductions where it’s most cost-effective. Examples include the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the United States.
  • The Social Cost of Carbon (SCC): The SCC method involves estimating the long-term economic damages caused by each additional ton of CO2 emissions. These damages can include things like reduced agricultural productivity, increased health care costs due to heat-related illnesses, and damage from extreme weather events.
  • Implicit Carbon Pricing: They are the indirect methods through which the emission of CO2 is made more expensive. India’s tax on fuel is an example for this.
  • Other methods, such as baseline-and-credit, carbon fee and dividend, and hybrid approaches, combine elements of both carbon tax and cap-and-trade systems. The choice of method depends on a region’s specific goals, economic conditions, and political considerations. The primary aim is to provide a financial incentive for individuals and organizations to reduce their carbon emissions, thereby addressing climate change.



‘Cap and Trade’ system, often seen in news, is related to:

(a) Carbon pricing

(b) Export of textile products

(c) Cryptocurrencies

(d) Base erosion and Profit shifting