Carbon Pricing: What are the different approaches and are either effective?

Our world is in trouble.

Apart from the pandemic wreaking havoc on communities throughout the world (here is a good resource if you are looking for ways to help India during this time), the effects of global warming are growing increasingly worrisome.

Through environmental tracking over nearly 200 years, scientists have found that our global temperature has increased by 2.2 degrees Fahrenheit since the mid-1880s, with the greatest change happening in the late 20th century. The most concerning finding: some predict that this number is even higher as our oceans have absorbed 90% of heat caused by greenhouse gases.

The effect? Glaciers are melting, sea levels are rising, and our weather has become extreme. While we might not be able to visibly see the effects in our day-to-day lives, Google recently released a time-lapse that shows these changes over the past 37 years. It’s not pretty.

And that’s only just the beginning. The long-term effects of global warming could take shape through food shortages and public health challenges. 

You might be wondering what our government and global governing bodies are doing to make progress against these alarming trends in our atmosphere. Well, in 2005, the Paris Agreement introduced ‘carbon pricing,’ a toll associated with emitting pollutants into the air.

There are two types of Carbon Pricing – Emissions Trading Systems (ETS) and Carbon Taxing.  

What are they?

In Emissions Trading Systems, conversationally referred to as ‘cap and trade,’ a government will impose restrictions on the level of greenhouse gases a company can emit each year. Go over that limit and you will pay a hefty fine. This system also allows companies to sell emission permits, or Carbon Credits, if they are under that limit. 

A Carbon Tax, on the other hand, is just what its name implies – it is a tax on any form of greenhouse gas emission.

Are either effective in curbing the effects of global warming? 

It is widely agreed upon that Carbon Pricing is an effective strategy in curbing greenhouse gas emissions. Sweden is the best case study for this. By implementing Carbon Pricing strategies, in just 30 years the country was able to cut its carbon emissions by 25% despite the economy growing by 60%. 

However, while both types of Carbon Pricing have proven to be beneficial to our environment, Carbon Taxing is the most effective approach. 

By imposing a tax on all levels of emissions, it hits businesses where it hurts the most - their bottom line - and forces them to come up with creative ways to sustainably operate. In the long run, this could actually benefit a business by making them more energy-efficient. The investment in sustainable solutions by a company could even be sold or used by others in their industry - similar to how cloud services work. 

By default, Emission Trading Systems is the least effective approach to Carbon Pricing. It tells businesses it’s okay to emit as long as it’s under a certain level. Further, it doesn’t set different restrictions based on the size of the business. 

So, what do you think about Carbon Taxing and Emission Trading Systems? Drop a comment below to let me know!