In the face of escalating climate change, the adoption of effective strategies to mitigate greenhouse gas emissions has become imperative. Carbon pricing and market-based mechanisms have emerged as prominent strategies to incentivize emission reductions while fostering economic growth (State and Trends of Carbon Pricing 2023). Carbon pricing is a broad concept comprising two primary policy strategies: emissions trading and carbon taxation. Emissions trading involves setting a limit on total emissions and letting the market determine the price of emissions allowances, while carbon taxation establishes a fixed price for emissions and allows the market to dictate the overall level of emissions(Tietenberg 2013). While initiatives targeting climate change through carbon pricing are relatively recent, schemes to price pollution more broadly have been in existence for some time. Various forms of emissions trading and pollution charges have a history predating carbon pricing initiatives. Notable examples include the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the United States (Narassimhan et al. 2018).

Market-based mechanisms complement carbon pricing by providing financial incentives for emission reduction projects. These mechanisms include carbon offsetting, where entities invest in projects that sequester or avoid emissions, such as afforestation or renewable energy initiatives, to offset their own emissions. Additionally, mechanisms like the Clean Development Mechanism (CDM) under the Kyoto Protocol facilitate emissions reduction projects in developing countries by allowing developed countries to invest in these projects and receive carbon credits (Redmond and Convery 2015).

The political economy surrounding direct carbon pricing has always been complex. This has increased further with a significant surge in consumer prices, particularly in energy bills, has intensified pressure on policymakers to explore all avenues to alleviate immediate cost burdens(State and Trends of Carbon Pricing 2023). This includes, in some instances, discussions about potential modifications to carbon taxes and ETSs. Strategies like targeted revenue recycling and incentives for investments in low-carbon technologies have been employed to enhance access to eco-friendly alternatives, support development initiatives, and alleviate living costs for lower-income populations. Numerous studies have indicated that direct carbon pricing can align with economic development goals without necessarily impeding economic growth or employment opportunities (Schoder 2023).

The effectiveness of carbon pricing and market-based mechanisms in achieving emission reduction targets and promoting sustainable development is dependent on multiple factors, including price stability, regulatory frameworks, and stakeholder engagement. Furthermore, once also needs to discuss and address challenges such as carbon leakage, distributional impacts, and the need for international cooperation to address transboundary emissions. Such efforts would collectively enable in advancing climate mitigation efforts globally.

References

Narassimhan, Easwaran, Kelly S. Gallagher, Stefan Koester, and Julio Rivera Alejo. 2018. “Carbon Pricing in Practice: A Review of Existing Emissions Trading Systems.” Climate Policy 18(8): 967–91. doi:10.1080/14693062.2018.1467827.

Redmond, Luke, and Frank Convery. 2015. “The Global Carbon Market-Mechanism Landscape: Pre and Post 2020 Perspectives.” Climate Policy. https://www.tandfonline.com/doi/abs/10.1080/14693062.2014.965126 (May 16, 2024).

Schoder, Christian. 2023. “Regime-Dependent Environmental Tax Multipliers: Evidence from 75 Countries.” Journal of Environmental Economics and Policy 12(2): 124–67. doi:10.1080/21606544.2022.2089238.

“State and Trends of Carbon Pricing 2023.” 2023. doi:10.1596/39796.

Tietenberg, Tom H. 2013. “Reflections—Carbon Pricing in Practice*.” Review of Environmental Economics and Policy. doi:10.1093/reep/ret008.