Carbon Pricing

Abstract

This draft book chapter describes carbon pricing, reviews the literature surrounding the efficacy and economic impacts of carbon pricing, and contains a global summary of carbon pricing laws.

Carbon pricing is commonly meant to refer to two main types of climate policy instruments: carbon taxation and cap-and-trade. The price is levied on a unit of emissions of carbon dioxide, or some other greenhouse gas, measured in terms of its global warming potential. If working as intended, carbon pricing could supplant some of the legal mechanisms that work through administrative and enforcement agencies and other traditional legal channels. Carbon pricing thus devolves most emission abatement decisions to private actors and allows emitters to choose specific methods of emissions reduction, in so doing reducing reliance on regulatory compliance mechanisms and providing flexibility and certainty for regulated parties.

Projecting the amount of emissions reductions from carbon pricing is challenging, as current economic data and tools are useful for making simple, ceteris paribus predictions, but less useful for modeling the complex and broad dynamics of a carbon price. The peer-reviewed literature, including reports by the U.S. Information Agency, suggest that a $25 per ton carbon price would reduce emissions by 11% to 31% by 2030. Other estimates suggest larger reductions are possible. Carbon pricing also presents the prospect of revenues, which can be used for a variety of purposes. This chapter reviews several possible uses of carbon pricing revenues, suggesting some rough macroeconomic effects.