Carbon Pricing and Carbon Markets

Abstract

The high levels of greenhouse gases in the atmosphere have led to climate change. While many attempts were made to achieve a global consensus (Rio Summit, Kyoto Protocol, etc.), the breakthrough came with the Paris Agreement in 2015, where countries agreed to limit temperature change to 1.5 degrees Celsius above the preindustrial era. A key ingredient to achieving the target is to reduce greenhouse gas emissions. There are many ways to achieve this reduction. One is eliminating GHG emissions by shifting from fossil fuel to renewable energy. Another is to use technology to reduce GHG emissions. Governments are using economic intervention such as carbon pricing to move companies to adopt either of the two approaches. In this article I explore the role of externalities in carbon pricing, mechanisms of estimating a carbon price, the carbon markets and its components and the benefits of carbon pricing.