Carbon Markets
How emissions trading systems and carbon offset markets work, their successes and failures, and the debate over whether you can put a price on pollution.
Pricing Carbon
The basic logic of carbon pricing is elegant: if greenhouse gas emissions are free, businesses and individuals have no economic incentive to reduce them. By putting a price on carbon dioxide and other greenhouse gases, governments make polluters pay for the damage they cause, creating incentives to switch to cleaner alternatives. There are two main approaches: carbon taxes, which set a fixed price per ton of emissions, and emissions trading systems (ETS), which cap total emissions and let the market determine the price.
The European Union Emissions Trading System, launched in 2005, is the world's largest carbon market. It covers power generation, heavy industry, and aviation within Europe, accounting for roughly 40 percent of EU emissions. Companies receive or purchase emission allowances. If they emit less than their allocation, they can sell surplus allowances to companies that need more. The price of carbon in the EU ETS has risen from under 10 euros per ton in its early years to over 80 euros at its peak, finally reaching levels that economists consider high enough to drive significant behavior change.