What is carbon pricing?

Carbon pricing refers to policies that make it more expensive to pollute—ideally making polluters pay more to do business in such a way, without creating economic difficulties for everyone else.

A carbon price, or price for pollution, can be applied at various points, as fuel moves through the economy:

• upstream (on the raw material—coal, oil, or gas);

• midstream (on refined and processed fuels and other products);

• downstream (where fuels generate emissions).

Applying the price upstream is the most direct way to ensure the cost of polluting is paid by those doing business with polluting fuels. They may "pass through" that cost to other businesses and to consumers. To avoid pass through costs falling on households, small businesses, and community economies, revenues from a carbon tax can be returned to those affected, or to everyone.

Carbon pricing policy options include:

• Carbon tax—a direct tax on pollution, which can be upstream, midstream, or downstream.

• Climate income—a carbon fee paid as far upstream as possible, with all revenues returned to households in regular checks or bank deposits.

• Emissions trading—usually including a limit on the overall amount of pollution, with polluting businesses allowed to trade pollution permits, to facilitate their transition to clean energy systems. An emissions trading system, or ETS, is usually assessed midstream—on power companies, for instance.

• Border adjustment—a carbon price assessed at the border, to ensure goods and services originating in countries that don't price pollution aren't artificially cheaper than goods and services that pay the costs of pollution.

There are variations on each of these, and it is possible to have a carbon price that uses more than one of these options. It is also possible to use regulations to impose costs without a direct carbon price; this is less economically efficient and tends to mean pass-through costs are higher. In the absence of carbon pricing policy, we still pay for pollution; a study published in June 2022 found that inaction to curb climate change would cost the world $178 trillion over the next 50 years.

It is worth noting: a carbon tax is different from a fuel tax or gas tax. A fuel tax is often used to create a pool of public funds that can help to sustain infrastructure related to the vehicles using the fuel. Revenues may be devoted to maintaining highways, or subsidizing mass transit to reduce congestion. A critical difference is that a fuel tax is not intended to phase out the use of that fuel, whereas a carbon tax aims to reduce overall use of the fuel and eventually to phase it out entirely.

Because climate change is imposing devastating costs on people, economies, and nations, it will be increasingly important to enact policies that make polluters pay the full costs of their business activity. Nations can work together in bilateral or multilateral cooperative arrangements to participate in shared emissions trading systems or to align carbon taxes and other policies, to increase the economic efficiency of their energy transitions.

Carbon pollution leads to global heating and climate disruption, as well as air pollution. Pricing carbon is a way to free the future from these costly impacts.

For wealthy, industrialized countries, a carbon price can help to decarbonize their advanced industries, reducing overall pollution. For low and middle-income countries, who may not pollute as much, a carbon price is needed to safeguard the country's future against a pollution-centered economic model that harms people and nature, and could undermine overall economic prospects in a clean economy.

A carbon price is a way to make future climate security and resilience more likely.

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Carbon Pricing resources

• Overview of climate income, also known as carbon fee and dividend – CCI

• People-centered carbon pricing is a shortcut to a better future – CCI

• Canada becomes first country to issue climate income cheques – CCI

• Carbon Pricing: a Global Opportunity – Canada PM Trudeau

• Carbon Pricing and the Cost of Living Crisis – CCL UK

• Carbon Pricing Leadership Coalition

• Carbon pricing’s watershed moment: Leadership Coalition reflects on 6 years since Paris – World Bank

• Provisional agreement reached on EU Carbon Border Adjustment Mechanism – European Council

• International Carbon Pricing Cooperation dashboard – CCI

• Updated PARIS Principles to Accelerate Cooperative Climate Resilience – CCI

• Report finding climate inaction will cost $178 trillion over 50 years – Deloitte