The carbon price refers to determining how much carbon dioxide producers must pay for the right to emit a certain amount.
Carbon pricing refers to the method of determining how much carbon dioxide producers must pay for the right to emit a certain amount. This is a feature of different regulatory plans designed to reduce carbon emissions, as carbon dioxide contributes to climate change. In schemes that involve a carbon tax, carbon pricing means deciding which tax amount would significantly reduce emissions without unduly harming the industry or the economy. It is also a feature of some cap and trading plans, in which companies can acquire the right to emit more carbon dioxide by purchasing the credits that allow them to do so. The price of carbon dioxide is generally given as the price per metric ton.
There are several proposed ways to implement carbon pricing through a cap-and-trade or taxation system. A cap-and-trade plan could initially include auctioning allowances, simply distributing them, or involving some combination of both. Taxation can be a direct price per ton or be part of a hybrid plan that includes a cap and negotiation form. Some businessmen see pure taxation as a penalty, while some economists argue that it provides more incentives to reduce pollution. A possible advantage of cap and trade is that it could encourage innovation in reducing emissions, rather than encouraging industries to reduce economic output.
The carbon pricing discussion also deals with two economic factors, one known as a direct cost and the other as an externality. A direct cost is a cost normally included in the calculation of income and expenses, such as the purchase of equipment or the cost of labor. An externality, also known as an indirect cost, is typically not accounted for, but still has a broader economic impact. Due to the negative effects of climate change, carbon emissions have the potential to produce a number of harmful externalities. Carbon pricing is seen as a way to reduce and possibly offset these externalities.
There are practical problems when trying to determine a price for carbon. One problem is that it is difficult to determine the real cost of any externalities before they occur. On the other hand, first determining the value of nearby natural resources, such as lakes or forests, is a standard part of the process of developing a specific area. Another question is to what extent the carbon price can or should be passed on to consumers and how this will affect the economy. Some also fear that products that go through several stages of development before becoming a finished product could become prohibitively expensive.