Carbon pricing is a market-based approach to reduce greenhouse gas emissions by putting a price on carbon pollution. There are two primary methods:
1. Carbon Tax
-How it works: A fixed price is imposed on each ton of carbon dioxide (or equivalent) emitted.
-Products covered: Typically applied to fossil fuels like gasoline, diesel, natural gas, and sometimes electricity.
-Collection: The tax is collected by the government through fuel distributors or energy companies.
-Payment: Companies pass the cost on to consumers through higher prices for goods and services, or they can absorb the cost to maintain competitiveness.
2. Emissions Trading System (ETS)
-How it works: A cap is set on the total amount of greenhouse gases that can be emitted within a specific period. Permits to emit are issued and can be traded on a market.
-Products covered: Often applied to large industrial emitters like power plants, factories, and refineries.
-Collection: Companies must hold enough permits to cover their emissions. If they emit more than allowed, they must buy additional permits. If they emit less, they can sell surplus permits.
-Payment: Companies purchase permits either through auctions or from other companies. The price of permits is determined by market supply and demand.
Relationship to CBAM
CBAM is essentially an import tariff based on the carbon price of the exporting country. It aims to level the playing field between domestic and imported goods.
Here's how it relates to existing carbon pricing mechanisms:
-If the exporting country has a carbon pricing system: The CBAM will be adjusted to reflect this, preventing double taxation.
-If the exporting country has no carbon pricing system: The full CBAM will apply, making imported goods more expensive.
The goal of CBAM is to incentivise countries to implement their own carbon pricing systems to avoid additional costs on their exports.
Key differences between CBAM and domestic carbon pricing:
-CBAM is a border adjustment, applied to imports, while domestic carbon pricing applies to domestic emissions.
-CBAM's primary goal is to prevent carbon leakage, while domestic carbon pricing aims to reduce overall emissions.
By understanding how carbon pricing mechanisms work, it becomes easier to grasp the complexities of CBAM and its potential impact on global trade and climate policy.