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A market-based approach to reduce carbon emissions that passes the cost of emitting greenhouse gases onto the companies creating the pollution. This instrument works to capture the external price of carbon caused by polluters that results in financial costs to the public, such as damages to property resulting from rising sea levels, health care costs from heatwaves and droughts, as well as damages to crops. Carbon pricing is advancing as a critical tool for governments and businesses pursuing climate action. VoLo Foundation supports carbon pricing as a method of achieving a decarbonized economy.
The are two primary types of carbon pricing: carbon fee (tax) and cap-and-trade.
A carbon fee (tax) establishes a price on greenhouse gas emissions and charges companies a dollar amount for every ton of emissions they produce.
A cap-and-trade system designates a set number of emissions “allowances” for businesses. Those allowances can be traded between companies.
The idea behind a carbon fee is simple; the revenue generated by a tax on carbon would be collected by the government and then disbursed in several ways.
A policy is put into place where emitters of CO₂ must pay a fee for the tons of emissions produced through the use of fossil fuels, such as coal, gas, and oil.
Revenue is generated from the fee imposed on greenhouse gas emitting companies.
Putting a price on carbon will reduce emissions while providing clean, affordable energy.
The funds collected from a carbon fee could be allocated in a number of ways by the government; examples include a dividend that is distributed to households each month or the revenue could be used to support other clean energy initiatives.
Watch the video below to learn more about carbon dividends.
Cap-and-trade is a system designed to reduce pollution in the atmosphere.
The government sets a declining cap that is placed on emissions to drive down global warming. Allowances are set for every ton of greenhouse gases emitted by companies.
The trade aspect allows companies to buy and sell allowances that permit them to generate a certain amount of emissions. Big polluters will pay cleaner companies for unused pollution allowances. As the cap shrinks, the cost of pollution increases, supporting cleaner operations.
Cap-and-trade systems are being effectively used throughout the world today. China, the world’s largest emitter of greenhouse gases launched the initial phase of its carbon market in 2017. The program is expected to be the world’s largest and is a central component of the country’s strategy to tackle climate pollution.
In the U.S. eleven states currently participate in a cap-and-trade program that was put into place in 2009. California’s Cap-and-Trade Program was established in 2013 and connected with Quebec’s program in 2014, creating a strong carbon market with significant potential.
Carbon pricing has not yet seen success at a federal level. Although there have been attempts in congress – most notably the “Energy Innovation and Carbon Dividend Act”, which was introduced in both 2019 and 2021, but failed to gather the interest of lawmakers. However, despite the lack of attention, the bill captures the essence of what a carbon price and dividend system would look like if implemented federally.
The Energy Innovation and Carbon Dividend Act places a $15 fee per ton of carbon, including crude oil, natural gas, and coal. This $15 fee would increase by $10 every year with further adjustments based on progress toward emission reduction targets.
The bill includes exemptions for agriculture and the armed forces, rebates for facilities that capture and sequester CO2, and border adjustments – which is essentially a tariff that ensures carbon-intensive products from outside the US are taxed at the same level as domestic products. The revenue generated by the bill would go on to be dividend payments to US citizens or lawful residents. The fee would be decommissioned when emissions, and subsequently dividend payments, fall below specified levels.
Economists around the world consider carbon pricing the most economically efficient climate policy option. Resources for the Future (RFF) offers interactive carbon pricing tools to help users visualize the environmental and economic effects of different carbon pricing policy designs.
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