Climate change and global warming have gone from a niche political issue 20 or more years ago to front and center topics, which impact a wide variety of industries and much of our public discourse. From the Green New Deal to other plans to combat the spread of climate change and other ecological impacts, a wide variety of solutions have been proposed to help reduce the economic impact of any plan that might constrain industry in addition to promoting Earth’s long-term well-being. For many, one of the more business or market-friendly solutions is a carbon pricing plan. Below, we’ll explore what it is, how it works, and what it means for industry going forward in uncertain economic times.
What is Carbon Pricing?
Carbon pricing is when carbon emissions themselves are calculated and a cost is associated with the emission. For example, carbon emissions are created when coal, natural gas, and oil are used to create energy. These energy sources, known as fossil fuels, create the carbon emissions which are primarily responsible, if not heavily contribute, to climate change. Proponents of carbon pricing argue that climate change, including rising sea levels and temperatures, is mainly caused by industries and activities which disproportionately produce these outputs, and, therefore these effects.
By working to assign a price to these carbon outputs, businesses will become more conscious of creating these outputs and will, in turn, find a way to create less of them. This burden shifting from those who have to deal with the impact of climate change and find a solution, namely government and taxpayers, to those who create the carbon outputs, energy producers and other industries, is just one goal of carbon pricing. The other goal is to help ensure that more climate-friendly technology will be introduced and used in the fight against climate change by businesses as they look to reduce their overall carbon usage.
How Do Carbon Pricing Plans Work?
The first way to implement a carbon pricing plan is through a plan which has received its fair share of news coverage and is commonly known as cap-and-trade. This system would impose a cap on the amount of carbon emissions that could be used in a year and use a market-based system so manufacturers, energy producers, or others could obtain more. For example, if 100 carbon units are divided among qualifying businesses in whole or in part, some businesses can pay others or go to an open market to bid on carbon units which help ensure they make their energy or production quota. This incentivizes many businesses to 1) invest in more efficient ways to produce their product or energy and 2) invest in more environmentally friendly ways for these actions to happen. This also helps reward energy efficient businesses by allowing them to sell their share of the carbon unit to recoup the cost of installing and investing in environmentally-friendly technology and eventually profiting from such a decision in the short or long term.
The second way to implement a carbon pricing plan is through a carbon tax. A much more straightforward way to implement a carbon pricing plan, the carbon tax would penalize those who use carbon more by taxing them more. The incentive for any carbon producer would thus be lowering their tax burden by investing in energy efficient and environmentally-friendly technology. Some have also proposed a rising carbon tax over time so even the largest firms are not immune from the direct cost of producing carbon without taking steps to improve their energy efficiency. Finally, there are several hybrid models that take both plans into account which have been proposed and may be workable.
What does this mean for energy producers and other carbon-heavy industries?
Many individuals and business leaders have been watching the evolution of the carbon pricing plan and the different proposals surrounding it with interest for what it could mean for both the economy and the environment. While there are many proposals under discussion at various levels of government, Congress has yet to pass a bill which would mandate a definitive carbon pricing plan scheme. For now, the national debate will continue as to the best way to implement a carbon pricing plan, if one is implemented at all.