Carbon Pricing

There are many ways to design a carbon price. What they all share in common is that they make burning fossil fuels more expensive. This changes the value proposition between fossil fuel energy and forms of energy that don’t burn fossil fuels, making it cheaper to build, invest in, and use energy sources that release less or no carbon dioxide to the atmosphere.

Though it seems fairly straightforward to make it more expensive to pollute, there are many, many ways to accomplish this. Broadly speaking, there are two main approaches: 1) a carbon tax or 2) an emissions trading system (ETS) aka cap and trade. A carbon tax is a simple tax, or clear dollar amount, levied by a government on fossil fuels without any limits on the quantity of fossil fuels that can be emitted. By contrast, an ETS doesn’t set a clear price, but it does constrain the quantity of fuels that can be burned. Companies may buy, be given, or trade the right to emit a portion of the emissions under that cap depending on how the ETS is structured. There are also blends between these two policies, for example an ETS that has a minimum price floor (effectively a tax) below which permits cannot be sold. Alternatively, a carbon tax could be programmed to jump to a higher price if certain emissions targets are not met.

These carbon prices have the potential to raise a lot of money. There are a large variety of approaches employed in how to spend that money that may be entirely or include a mix of:

Many U.S. carbon pricing proposals have been designed with carbon border adjustment mechanisms as part of the enabling legislation (see the International section of this website for more information). All bipartisan carbon pricing bills that have been introduced into the US Congress have included a streamlining of regulations as part of the enabling legislation.