Carbon Pricing – towards building a cleaner, greener environment

environmentally friendly

As we battle the ill effects of climate change and the greenhouse effect, putting a tax on carbon emissions has become the path to attain the goals of protecting our environment and we need to act decisively about it. All the major institutions of the world are concerned with climate change, and governments and corporates are increasingly advocating the concept of carbon pricing to tackle climate change. So what exactly is this concept of putting a price on carbon emissions and why is the government and private sector supporting the idea of a carbon tax?

In carbon pricing, the external costs of emitting carbon are captured and the polluters who emit carbon have to pay for it in order to mitigate the costs associated with the ill effects of climate change. These are the expenses that the general public pays indirectly, such as damage or failure of crops due to adverse climatic conditions, health care costs related to air pollution and increasing frequency of famines and heat waves and even the price associated with the rising sea levels and flooding. A price on carbon emissions shifts back the onus of clearing the mess back to those who produce most of the carbon in the form of emissions and those who have the ability to reduce such kind of hazardous emissions. Instead of ordering who should reduce emissions, a carbon price is a kind of economic guiding factor that leads the polluters decide for themselves whether to stop the carbon emissions altogether, reduce their emissions or continue to pollute the atmosphere and pay for it. Thus, by this concept of carbon pricing, emissions are bound to reduce in a least cost way that is beneficial for the society and this is obtained in a most flexible manner. Carbon pricing also stimulates new technology development in clean energy and market innovation, paving the way for a low carbon economy.

Enforcing carbon pricing globally

There are two major ways in which carbon pricing can be achieved. One is emission trading systems (ETS) and the other is carbon taxes. An emission trading system, also known as cap-and-trade system caps the total quantity of carbon emitted in the atmosphere and lowers the cap over time. Industries are allowed a limited scope of emitting carbon and falling number of emission permits. Those industries that have low carbon emissions sell their credits to large emitters of carbon. Thus, by creating a market like scenario for carbon emissions, in which a supply and demand situation is created, an ETS basically sets a market price for the emission of carbon. The cap on carbon emissions helps the emitters to remain within their allocated budget and reduces the levels of carbon emissions in the atmosphere. On the other hand, a carbon tax directly sets a price on the greenhouse gas emissions, especially carbon content in the fossil fuels. Carbon tax regime is different from ETS as there is no predefined cap on the emissions of carbon but the price on the carbon emissions are fixed. Which policy to choose will depend on the individual nation and economic conditions.

The benefits of a carbon tax are widespread. First of all, it helps in our fight for countering the effects of manmade climate change and helps reduce extreme weather events such as flooding and intense drought. Putting a tax on carbon also helps in cleaning up the air and countering the ill effects of air pollution. This reduces the prevalence of smog, reduces the occurrence of diseases associated with air pollution such as asthma and reduces air pollution induced deaths. Carbon tax also creates a large number of jobs in the clean energy sector and encourages technological advancement. Industries are forced to take a low carbon emission technology approach and this spurs the development of the clean energy sector. The resultant new technologies are more efficient and clean and help in the fight towards mitigating the ill effects of climate change.

About the Author

Nikhil Kaitwade

With over 8 years of experience in market research and consulting industry, Nikhil has worked on more than 250 research assignments pertaining to chemicals, materials and energy sector. He has worked directly with about 35 reputed companies as lead consultant for plant expansion, product positioning, capacity factor analysis, new market/segment exploration, export market opportunity evaluation and sourcing strategies.

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