Skip to main content
blog costcarbon head

Carbon Pricing: Does It Work?

Carbon pollution is the number one contributor to climate change, so shouldn’t the biggest polluters be the ones paying for its impacts?


Look, if it was any other issue, it would be a no-brainer for politicians all along the ideological spectrum. In almost every other area, society works on something like a “You break it. You buy it.” principle where those responsible for damaging something are the ones responsible for the tab. Except, it seems, when it comes to the climate crisis.

Sure, climate change is an enormous and complex problem. One without any single silver bullet solution. But we know that some pretty basic and commonsense policy tools like carbon pricing – if done right and fairly – can make a real dent in emissions and trigger exactly the kind of broader cultural changes we need if we’re going to solve the crisis.

Right now, the stakes couldn’t be clearer. After all, just look at the horrifying destruction left by Hurricanes Harvey, Irma, and Maria in the past month. Then listen to all the scientists telling us that climate change is likely making these storms all the worse. Because, when you do, the question you have to ask isn’t “Should we be pricing carbon?”

It’s “Why aren’t we?”

So how does carbon pricing work? Who’s using it and how’s it’s been working out? Read on.

What Is Carbon Pricing?

When entire cities are flooded, farms dry out, or wildfires burn through forests and communities usually thanks in part to climate change, there is often a long – and costly – recuperation and rebuilding period. Infrastructure needs repairing or rebuilding. Homes may be damaged or destroyed, and although the federal government usually steps in to help financially, the cost of the recovery is paid for through higher taxes, government borrowing, and insurance rates. Not to mention the medical bills that fall on families affected.

But even as regular people spend years rebuilding their lives after climate events, the companies responsible for the majority of the carbon pollution driving them – think Big Oil – aren’t the ones picking up the bill. Even though they’re also sitting at the top of the list of the world’s most profitable firms. 

Which leads us to carbon pricing.

We know that the public costs of burning fossil fuels are enormous, but the market prices of carbon-intensive products and services don’t reflect that reality. Government subsidies for the fossil fuel industry and lack of accountability for carbon pollution allow market prices for these products to stay artificially low, effectively telling polluters that they are free to dump unlimited carbon pollution into the atmosphere without any consequences.

There are two main types of carbon pricing: emissions trading systems (often referred to as ETSs) and carbon taxing. For an in-depth and practical analysis of the various pricing mechanisms, their design considerations, and the advantages and disadvantages associated with each, download the Climate Reality Carbon Pricing Handbook.

Policies that put a price on carbon emissions aim to re-adjust the market to better reflect the true cost of carbon and shift that cost to the polluter. The good news is that policies, like carbon taxes or “cap-and-trade” programs, have already been adopted in a number of countries around the globe.

So Who Uses It?

Carbon pricing policies have been taking shape on various levels, from individual states in the US to multinational regions (like the EU) around the world. Even some corporations are using internal carbon pricing strategies on their own.

More than 40 nations around the world have implemented or are in the process of planning or implementing a carbon pricing initiative. Among them, some of the world’s strongest economies, including China, Australia, Brazil, and Canada. The European Union (EU) has adopted carbon pricing as a cornerstone of its climate efforts through the EU ETS cap-and-trade system. This system includes all 28 EU countries, as well as Iceland, Liechtenstein and Norway.

Related: Download The Climate Reality Carbon Pricing Handbook here.

Many states in the US have also implemented their own carbon pricing policies. US states like California have enacted statewide policies, while nine states in the Northeast have joined the Regional Greenhouse Gas Initiative, the first mandatory market-based program in the United States to reduce greenhouse gas emissions from power plants.

Some corporations have even developed carbon pricing mechanisms to mitigate risks associated with the climate crisis, decarbonize and reduce greenhouse gas footprints, prepare for a low-carbon economy, and increase operational efficiency.  As of 2016, more than 1,200 companies globally report that they have internalized or plan to internalize carbon pricing. Among those are 210 US companies, including big names like Microsoft Corporation, Walt Disney Company, and General Motors Company.

Does It Work?

So if all these policies have been implemented, how do we know if it’s working?

In British Columbia, carbon emissions have been taxed since 2008. The results? The price of gasoline increased by 17 cents, but personal and corporate taxes went down. The carbon tax itself raised about $4.3 billion and helped cut emissions in the region. And Sweden has seen carbon emissions drop by 25 percent under the highest carbon tax in the world, while seeing a 60 percent growth in GDP – proving that you don’t have to choose between a healthy planet and a healthy economy.

On the corporate side, Microsoft has been able to invest more money in renewable energy and increasing energy efficiency by enforcing a fee for energy usage and employee air travel. These results are real and tangible benefits of carbon pricing that prove the benefits both for our planet and for our wallets.

For some policies, however, it’s too early to tell. With the growing popularity of programs like ETSs, the implementation of newer programs is too recent for us to have any meaningful data. But the goals set by these policies are ambitious. For example, California’s policy aims to reduce emissions by about 28 percent to 1990 levels by 2020. Meanwhile, The EU ETS aims to reduce emissions covered under the system by 43 percent compared to 2005 levels.

With the impacts of the climate crisis at our doorstep, it’s time to talk about common sense solutions. We need to take climate action into our own hands and demand that our governments pursue policies that will help combat these impacts. Carbon pricing is an effective way to change market dynamics so that those most responsible for climate change are those paying for its impacts.

Because once they do, not only do we begin to make things a little fairer, but those same polluters have a financial incentive to clean up their act, cutting emissions and turning to low and zero-carbon alternatives like wind and solar instead. Which helps all of us move forward to a safe and sustainable future for the planet.

To learn more about carbon pricing, download The Climate Reality Carbon Pricing Handbook here. You can also join our activist email list to get updates on ways that you can act on climate.