emissions. The cap is reduced over time so that total emissions fall, providing
certainty in global emissions reduction. Usually, after each year, a company must
surrender enough allowances to cover all its emissions; otherwise, heavy fines are
imposed. Trading brings flexibility that ensures emissions are cut where it costs
least to do so. Both the cap and the rules to attribute allowances to the installations
covered by the scheme is under the responsibility of a governance body, mostly
from public policies like the European Commission for the EU ETS, the Ministry
for Ecology and Environment for the China National ETS, or the Regional
Greenhouse Gas Initiative for the nine states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont.
A carbon tax sets a price on carbon by defining a tax rate on GHG emissions or on
the carbon content of fossil fuels. In this case, the emission reduction outcome is not
pre-defined (as in the case of a cap) but the carbon price is.
Governments are increasingly recognizing carbon pricing as a key policy
instrument to meet climate mitigation targets. Of the 185 Parties that have submitted their nationally determined contributions (NDCs) to the Paris Agreement, 96
representing 55% of global GHG emissions have stated that they are planning or
considering the use of carbon pricing as a tool to meet their commitments [26].
Although many jurisdictions are broadening (increasing emission coverage) and
deepening (increasing prices or stringency) their carbon pricing instruments to
better align with their climate goals, these efforts are insufficient, as less than 5% of
global emissions covered under carbon pricing initiatives, are priced at a level
consistent with achieving the goals of the Paris Agreement, i.e. US$40/tCO 2 to US
$80/tCO 2 by 2020 and US$50/tCO 2 to US$100/tCO 2 by 2030. Notably, about half
of the emissions covered by carbon pricing initiatives are still priced below US
$10/tCO 2 [26]. A robust carbon price may promote the investment in clean,
low-carbon technologies because makes high-carbon ones more expensive and then
less competitive.
There are also more indirect ways of pricing carbon, such as through fuel taxes,
the removal of fossil fuel subsidies, or through payments for emission reductions.
Beyond regulated or compliance markets or instruments, there are also voluntary
markets where private entities can purchase emission reductions to offset their own
emissions, or to support mitigation activities through results-based finance.
Experience in many countries shows that carbon pricing is cost-effective in
reducing GHG emissions. However, other elements of climate mitigation policies
should complement carbon pricing schemes to accelerate the transition to carbon
neutrality by the mid of this century, as stated in the Paris Agreement. These may
include setting fuel efficiency standards for vehicles, imposing energy-efficient
building codes, promoting urban designs that encourage public transport and less
use of personal vehicles, incentivizing renewables, electric vehicles and the
charging infrastructure, or phasing out the use of coal as a fuel in power plants, and
ultimately supporting R and D policies. The way governments choose to disburse
carbon revenues has a considerable impact on reducing emissions [27], with many
allocating them in varied mitigation initiatives, like subsidizing the public transportation modes.
Carbon Economy and Carbon Footprint
17
certainty in global emissions reduction. Usually, after each year, a company must
surrender enough allowances to cover all its emissions; otherwise, heavy fines are
imposed. Trading brings flexibility that ensures emissions are cut where it costs
least to do so. Both the cap and the rules to attribute allowances to the installations
covered by the scheme is under the responsibility of a governance body, mostly
from public policies like the European Commission for the EU ETS, the Ministry
for Ecology and Environment for the China National ETS, or the Regional
Greenhouse Gas Initiative for the nine states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont.
A carbon tax sets a price on carbon by defining a tax rate on GHG emissions or on
the carbon content of fossil fuels. In this case, the emission reduction outcome is not
pre-defined (as in the case of a cap) but the carbon price is.
Governments are increasingly recognizing carbon pricing as a key policy
instrument to meet climate mitigation targets. Of the 185 Parties that have submitted their nationally determined contributions (NDCs) to the Paris Agreement, 96
representing 55% of global GHG emissions have stated that they are planning or
considering the use of carbon pricing as a tool to meet their commitments [26].
Although many jurisdictions are broadening (increasing emission coverage) and
deepening (increasing prices or stringency) their carbon pricing instruments to
better align with their climate goals, these efforts are insufficient, as less than 5% of
global emissions covered under carbon pricing initiatives, are priced at a level
consistent with achieving the goals of the Paris Agreement, i.e. US$40/tCO 2 to US
$80/tCO 2 by 2020 and US$50/tCO 2 to US$100/tCO 2 by 2030. Notably, about half
of the emissions covered by carbon pricing initiatives are still priced below US
$10/tCO 2 [26]. A robust carbon price may promote the investment in clean,
low-carbon technologies because makes high-carbon ones more expensive and then
less competitive.
There are also more indirect ways of pricing carbon, such as through fuel taxes,
the removal of fossil fuel subsidies, or through payments for emission reductions.
Beyond regulated or compliance markets or instruments, there are also voluntary
markets where private entities can purchase emission reductions to offset their own
emissions, or to support mitigation activities through results-based finance.
Experience in many countries shows that carbon pricing is cost-effective in
reducing GHG emissions. However, other elements of climate mitigation policies
should complement carbon pricing schemes to accelerate the transition to carbon
neutrality by the mid of this century, as stated in the Paris Agreement. These may
include setting fuel efficiency standards for vehicles, imposing energy-efficient
building codes, promoting urban designs that encourage public transport and less
use of personal vehicles, incentivizing renewables, electric vehicles and the
charging infrastructure, or phasing out the use of coal as a fuel in power plants, and
ultimately supporting R and D policies. The way governments choose to disburse
carbon revenues has a considerable impact on reducing emissions [27], with many
allocating them in varied mitigation initiatives, like subsidizing the public transportation modes.
Carbon Economy and Carbon Footprint
17