Carbon Pricing

What is Carbon Pricing?

• It’s an instrument that captures the external costs of greenhouse gas (GHG) emissions and links it to their sources through a price in the form of a price on the carbon dioxide (CO2) emitted.
• Through this measure the burden of emission and its effects is shifted to those who are producing it. This further discourages producers from emitting GHG gasses recklessly.
• It is in pursuance with Kyoto Protocol and Paris Agreement of UNFCCC which aims at limiting the GHG emissions, avoid extreme weather conditions and limit the temperature of earth to 1.5 degree Celsius by 2050.

Has carbon pricing served its purpose?

• Carbon pricing is seen as an effective tool to limit GHG emissions.
• It has led to internalisation of the externalities thus leading to polluters owning the responsibility and acting on it in various sectors.
• However, the extreme weather conditions have not stopped and there is a global rise in temperature.
• Reasons for carbon pricing not realising its full potential:
  • The member countries have not obliged to their commitments under the Paris Agreement faithfully, keeping their development needs first thus sideling the sustainability premise.
  • The developing world does not have required funds to upgrade their technology for sustainable development.
  • The political economy, primarily in the developing world has forced the political class to go slow on sustainable transitions. Hence the technology in agriculture, manufacturing has remained mostly the same or has moved at snail’s pace.
  • Developed countries have not kept their promise of COP 16 accord of climate financing under which they were required to contribute $100 billion annually for sustainable projects in the developing world.
  • Reversing climate change requires holistic changes. Carbon pricing alone can’t be an answer to climate change. It has served its purpose in limited capacities because of the above mentioned reasons.

Different types of Carbon Pricing

• Emissions trading system: Under this mechanism emitters can trade emission units to meet their emission targets. The emitter can either implement internal abatement measures or acquire emission units in the carbon market.
• The two main types of ETSs are cap-and-trade and baseline-and-credit:

• Cap-and-trade systems: Under this mechanism, a limit on the emissions is put and emissions allowances are distributed through auctions for the amount of emissions equivalent to the cap.
• Baseline-and-credit systems: Here a baseline emission level is set and credits are issued to entities that have reduced their emissions below this level. These credits can be sold to other entities exceeding their baseline emission levels.

• Carbon tax: Under the mechanism, an explicit tax rate on GHG emissions is set
• Offset mechanism: The protocol predetermines the GHG emission reductions for projects. The emission certificates can then be sold to the emitters who could not meet the emission norms.
• RBCF: Result Based Climate Finance is an instrument through which payments are made after predefined outcomes pertaining to managing climate change.
• Internal carbon pricing: It is an entity which an entity uses internally to guide its decision-making process in relation to climate change impacts, risks and opportunities.

Different countries, different carbon pricing

• Different countries deploy different types of carbon pricing on the basis of national circumstances and political realities.
• Under mandatory carbon pricing initiatives, ETSs and carbon taxes are the most common types of instruments which emitting entities follow.
• The choice of carbon pricing is in alignment with the broader national economic priorities and institutional capacities.
• In India there is no specific carbon tax but there are hosts of other mechanisms to limit climate change such as: 

• PAT (Perform, Achieve and Trade) Scheme
• Coal Cess
• Renewable Purchase Obligations (RPO)
• Renewable Energy Certificates (REC)
• Internal Carbon Pricing (ICP).

Source: TH