Glossary term
Carbon Pricing
Subject: Sustainability and ESG, Climate Risk
Also known as: Carbon tax, Emissions trading, Emissions Trading System (ETS), Cap and trade
Carbon pricing puts a cost on greenhouse gas emissions, through a tax or a tradable permit scheme, so that polluters bear the damage they cause and have a reason to cut it.
Explanation
Two main routes exist. A carbon tax sets the price per tonne and lets the amount of emissions follow. An emissions trading system, often called cap and trade, sets a limit on total emissions, issues or auctions permits up to that limit, and lets firms trade them, so the price emerges from the market. Both make low-carbon choices cheaper relative to high-carbon ones. Revenue may be used to cut other taxes or fund green projects. Coverage and price vary by country and sector, and border adjustments are used in some places to stop production simply moving to regions with lower prices. Firms meet the topic in cost forecasts, investment decisions and internal carbon prices. Treasury teams use the expected price path to decide which plants to upgrade and which to retire.
Example
A cement producer operates in a region with an emissions trading system. Its free permits cover 70% of its output, and it must buy the rest at the market price. When the permit price doubles, the finance team sees a rising cost line, and the board approves a kiln upgrade that was previously ruled out as too expensive.
Not to be confused with
- Carbon Offset
- Pricing is imposed by law on emitters. An offset is a voluntary or scheme-based credit bought to compensate for emissions.