Fossil fuels (natural gas, coal, and oil) are the leading causes of climate change. The fuels used for electricity generation, powering cars, and heating dwellings generate undesirable greenhouse gas emissions. In general, the cost to taxpayers or individuals is directly affected but not considered in choices made by manufacturers or customers of carbon-intensive commodities, including health costs and damage to heatwaves, flooding, serious down-pouring, and droughts.
In most instances, the total cost of changing the climate is met. Carbon pricing helps to incorporate climatic risks into business costs. Carbon emissions have become more expensive, and consumers and manufacturers are looking for ways to use less generated technologies and products (Hsu, 2017). This outcome will make the market effective in reducing emissions, promoting a change to a reduced-carbon economy, and encouraging demand for low-carbon technology. Cost-effective reduction in emissions also requires complementary cleaner energy policies.
Carbon pricing is an application that utilizes a price mechanism to reduce carbon emissions to transfer costs to emitters. Its overall objective is to dissuade the use of such carbon dioxide-emitting fossil fuels to safeguard the environment, address climate change root causes and comply with international and domestic climate agreements (Vale, 2016). Thus, global countries endeavor to partner with environmentalists and economic players, and other entrusted stakeholders to guarantee that the worldwide population lead quality and sustainable lifestyles.
Carbon pricing is a tool that covers external greenhouse gas emissions and links them with their sources, typically in the shape of a carbon dioxide (CO2) price. A carbon price contributes to shifting the burden of the damage to those responsible for avoiding air pollution. An economic sensor for issuers is a CO2 price allowing them either to transform and reduce their activity or to continue releasing and paying their emissions instead of controlling who should cut the emissions wherever and how. Thus, the global environmental objective is achieved as flexibly and cost-effectively as possible for society (Vale, 2016).
Appropriate pricing of emissions of GHGs is essential if the external costs of climate change are to be internalized in broader probable scope of financial decision-making and financial incentives for green innovation. It can contribute to mobilizing the financial investments required to promote cleaner energy and market innovation, stimulating new low-carbon economic growth drivers.
Governments and businesses increasingly accept carbon pricing as a means of transitioning to a lower-carbon economy. Carbon pricing is among the tools in the climate package necessary to minimize emissions for governments. In most cases, it is a basis of income that is particularly significant in a financially viable setting of budgetary limitation. Companies use institutional environmental regulation to evaluate their operations and spot possible climate-related risks and revenue advantages by reducing compulsory carbon prices. Lastly, Tvinnereim and Mehling (2018) claim that long-term shareholders use emissions trading schemes to analyze their portfolios, reassess investment strategies and allocate investment capital for low-carbon or climate-resilient activities to impact climate change policies.
In the framework of a cap-and-trade plan, regulations or conventions will limit or “cap” discharge of carbon from specific economic divisions (or the financial system) and allow (or permit carbon emissions) to equal the cap. For illustration, unless the expectations were ten thousand tons of carbon, 10,000 ton stipend would be available. A waning cap on emissions would contribute in time to reducing emissions (Jin et al., 2017).
Any cause of emissions assigned to the cap would have to maintain allowances equal to their emissions (for example, plants or refineries). The PSOs can acquire subsidies by auctioning (where they offer the permits they need) or allocating them. After being granted allowances, these companies might be free to transact or put up for sale allowances amongst themselves or other marketplace participants.
As allowances are restricted, they will seek to reduce their emissions by lowering the amount of allowances they must procure because these payments are fixed and thus valuable. The resulting contact between demand and market supply sets the carbon price. Carbon taxes are laws and regulations that impose a charge per unit of carbon emanation from industry or the entire global society. Taxable source industries’ stakeholders would have to recompense taxes equivalent to the per-ton charge multiplied by the total discharge of their sources of emission.
Persons who are able to cost-effectively cut emissions would reduce their taxes (Vale, 2016). Those taxable would be encouraged to reduce their release by shifting to cleaner energies and more efficient energy use. An increased carbon tax would ensure that emissions decrease over a period.
Hybrid alternatives involve initiatives that restrict carbon discharge but limit the price. Another systematic technique adapts the levy to guarantee that specific drop targets are met. A one-third amalgam approach may be implementing a carbon limit and trade plan for particular industries by jurisdiction and applying a carbon duty to others. Carbon pricing projects may also function in addition to other policies on renewable power sources, such as the rules on renewable electricity, energy efficiency, and fuel efficiency regulations.
It is apparent that climate change needs timely greenhouse gas mitigation actions. The United Nations Climate Change Framework Convention (UNFCCC) provides all countries with the top guidelines to reduce greenhouse gas emissions consistent with environmental sustainability policies. The Kyoto Protocol, considered one of the UNFCCC implementation documents, offered an opportunity under the channel ”Flexibility Mechanisms” to use carbon trade (pricing) apparatus.
The Paris agreement reflects significant developments in international ecological pacts. The Accord has new dimensions to increase collaboration between all stakeholders through Section 6 of the accord (La Hoz Theuer et al., 2019). The ultimate goal of those foremost concerns is to mitigate climate change by the end of the 21st century below two degrees. To do so, the instruments for carbon trading under Article 6 of the Paris Convention are recognized.
Economists argue that carbon pricing is the best way to reduce climate-changing carbon pollution. Set a price on carbon pollution for 70 national and subnational governments. Global countries already have solutions to climate change. The path to a carbon-free future can lead to renewable energy, electric cars, and fast, dependable public transport. The price of carbon creates an economic incentive to move towards lower emissions and behavior.
Carbon is just pricing. The most polluting organizations and people pay for the damage they cause. Governments can channel carbon-pollution pricing funds to provide people with better options for reducing their carbon footprints. Accelerating the transition to cleaner, more efficient energy solutions by putting a value on the contaminant emissions via a carbon tariff and cap-and-trade scheme is vital (Jin et al., 2017). Society also has low-carbon alternatives, improving by the day to our most essential emission sources.
As early as 2017, a carbon price was paid by the ETS or a carbon tax in 42 nations. Over the last ten years, the number of carbon pricing initiative jurisdictions has more than doubled. These jurisdictions account for around a quarter of the world’s GHG emissions and cover seven out of ten largest economies worldwide. The number of initiatives on carbon prices implemented or planned in the last ten years has quadrupled and nearly doubled to 47 in 2017 (Cramton et al., 2017). Half the new initiatives undertaken or scheduled during the previous five years have been implemented in upper-middle earnings economies, while carbon pricing initiatives have been implemented in high-income economies almost exclusively by 2013.
In 2017, Colombia launched a $5/tCO2e carbon tax. In 2017, the tax generated 172 million dollars of government income, which the government intends to use to support projects for environmental and rural development. In Colombia’s acquisition of the accredited emissions offset projects that further directs low-carbon investments in Colombia, vendors, and dealers of carbon fuels responsible for tax are eligible (Aristizábal Alzate & González Manosalva, 2019).
Colombia, too, recently approved emissions trading legislation (ETS). The income focuses on conserving and preserving the ecosystems (Calderón et al., 2016). As part of a wider tax reform triggered by a sharp drop in oil prices, the regulation also established tax breaks on clean energy generation. The taxes have provided the environment with a stabilized source of finance. They also have developed opportunities for banks to undertake carbon compensation.
However, with the country continuing to be one of the major emitters of greenhouse gases despite the efforts of the entrusted environmentalists, the entrusted national players will need to conduct regular studies (Aristizábal Alzate & González Manosalva, 2019). Also, the nations will continue to invest in high-tech communication equipment to ensure that they interact well will the other external and internal stakeholders entrusted with the initiative’s implementation.
Some of the world’s established economies such as Canada, the US, Korea, South, Japan, and China, struggle to achieve outstanding commitments to control global warming emissions. Each country must develop a path to net zero, but carbon pricing is expected to be quite an essential and integral part. A carbon price thus determines the number of companies paying for their emissions. The increased the price, the more pollution incentives and investment in low carbon technology will be increased (Boyce, 2018). The government can, for example, impose a carbon tax on those payments, which taxes companies have to pay for those who pollute or an emissions trading system (ETS).
Carbon price success has spurred the growth of global carbon markets at both the regional and national levels. Paris Agreement’s Article 6 provides for the framework for maintaining a global temperature increase well below 2oC, including the provisions that allow countries, in particular utilizing carbon pricing to fulfill risk reduction commitments, to come together to accomplish their nationally determined contributions (NDCs).
How these provisions of Article 6 are implemented is not yet clear? The Paris Agreement protocols, including modalities for the operation of eventually cutting pollution under Article 6, are slated to be finalized by December 2018 and are therefore under considerable pressure to reach a general agreement on the regulations guiding new mechanisms (La Hoz Theuer et al., 2019). The adoption and the aspiration of carbon pricing policies (CPP) are driven powerfully by trade interdependences and concern about the competitive disadvantages of the global market. When their adjoining trading partners and opponents do so, too, authorities opt for more ambitious CPPs.
Carbon price reduction can lead to efficient emission cuts, stimulate innovation and allow companies and families to choose how emissions are to be reduced. It implies that green technological developments can compete with carbon fuels or even other GHG technologies equally. To accelerate the low carbon transition, expanded carbon prices to more places and the fossil fuel subsidy reform (Rosenbloom et al., 2020). Carbon pricing can also deliver broader sustainability value and minimize income disparities when designed and implemented effectively. Inadvertently, climate action can harm the underprivileged if policies are not correctly formulated. Although the protests reflect a wave of broader anger at the stagnant living and socioeconomic disparities, they initially sparked an increase in fuel taxes.
Carbon pricing programs can help the government invest in significant public goals such as health, education, or transportation systems by creating new sources of government funds. Alternatively, tax cuts or rebates are available to return income directly to citizens. In combination with these measures, the revenue may also be used (Boyce, 2018). Carbon pricing structures can be a powerful tool to support only a transition through these actions, assisting the disadvantaged or other organizations impacted negatively by radical reforms related to the low carbon transition.
The advantages of pricing carbon are significant. Climate change is among the most potent policy tools available. It can decarbonize global economic activity by altering consumer, business, and investor behavior while generating technological innovation and income that can be used for productive purposes. In short, well-designed carbon prices provide three advantages: environmental protection, clean technology investments, and revenue increase. Sadly, some schemes have impeded competitiveness in businesses (Cramton et al., 2017). Suppose there is an inaccurate set of laws and measures on carbon pricing at the regional and global levels.
In that case, carbon leaks can arise, which means that carbon-intensive sectors or businesses shift their transactions to less expensive jurisdictions. Fortunately, the existence of carbon pricing guidelines and the Paris Agreement’s Article 6 played is making it easier to implement the program to reduce the emission of carbon dioxide (La Hoz Theuer et al., 2019). Thus, carbon pricing is understood to aid in adopting near-zero-emission technologies by escalating the applied fee of carbon-intensive services and goods and (indirectly) improving the performance of environmentally innovative technologies. Not only current carbon prices but as well anticipations of prospect carbon prices are encouraging investments in low-carbon alternatives.
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