Setting prices on pollution and harmful activities can be an effective instrument to tackle the unintended impacts of society’s consumption and production decisions. Governments can “price” environmental impacts by directly taxing activities that cause them, or by creating market-based mechanisms like emissions trading schemes. Other policies can also be modeled as creating an implicit carbon price because they change the relative cost of sustainable and unsustainable activities.
Applying a price to these impacts can ensure that they are properly accounted for in planning and decision-making processes, placing the cost of pollution on polluters and, ultimately, helping to reduce environmental harm and ensure the benefits of a healthy, livable planet.
Expanded carbon pricing will aid the transition to a low-carbon future. Setting prices makes carbon-intensive activities more expensive, incentivizing pollution reduction or the development of alternative, lower-emission technologies.
Carbon prices, which typically cover carbon dioxide (CO2) and equivalent greenhouse gases (GHG), can be calculated for various objectives. For example, prices can reflect GHG emissions’ impacts or costs to society (referred to as the social cost of carbon), or target an amount to incentivize the economy to meet specific GHG targets.
In market economies, carbon prices tend to encourage the most economical emissions reductions first. Although direct pricing by itself is not sufficient to reach the mitigation objectives of the Paris Agreement, it can complement a broader toolkit of climate standards and investments.
Similarly, environmental taxes and fees focused on other types of non-carbon pollution and waste can curb unsustainable practices, protecting ecosystems and low-income communities. These policies can shift behavior to help reduce pollution and environmental degradation.
Even if pricing schemes are progressive — with wealthier people paying proportionally more of the costs than poorer ones — the burden of such policies on vulnerable communities must be evaluated and mitigated. Governments can recycle revenue from pricing policies as direct transfers. They can also use revenues to support a broad range of policies that support poor communities, address regional disparities and manage shifts in employment opportunities from polluting to less-polluting industries.