Explained: Can climate change be solved by pricing carbon?

What is the News?

Pennsylvania has become the first major fossil fuel-producing state in the US to adopt a carbon pricing policy to address climate change. 

What are the different approaches adopted by countries to address climate change?

The United States has adopted a less direct approach known as the Social Cost of Carbon. This approach calculates future climate damages to justify tougher restrictions on polluting industries.

On the other hand, countries like Canada have adopted a Carbon Pricing approach. For example, Canada imposes fuel charges on individuals and also makes big polluters pay for emissions. It’s one of 27 nations with some kind of carbon tax.

What is the Carbon Pricing Approach?

Carbon pricing is an instrument that captures the external costs of greenhouse gas(GHG) emissions and ties them to their sources through a price usually in the form of a price on the carbon dioxide (CO2) emitted. 

These GHG emissions include the costs of emissions that the public pays for, such as damage to crops, health care costs from heatwaves and droughts, and loss of property from flooding and sea-level rise.

A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it.

Types of Carbon Pricing: There are two main types of carbon pricing namely: 

Emission Trading System(ETS): It is a system where emitters can trade emission units to meet their emission targets.

Carbon Tax: It directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.

What is the difference between the Social Cost of Carbon and Carbon Pricing?

The social cost of carbon attempts to capture the value of all climate damage centuries into the future.

Carbon pricing reflects how much companies are willing to pay today for a limited amount of emission credits offered at an auction.

In other words, the social cost of carbon guides policy, while carbon pricing represents policy in practice.

Source: This post is based on the article “Explained: Can climate change be solved by pricing carbon?” published in Indian Express on 24th April 2022