Knowledge Agora

     Carbon pricing mechanisms are tools used to place a financial cost on carbon emissions, encouraging companies and individuals to reduce their carbon footprint. By assigning a monetary value to emissions, carbon pricing helps internalize the environmental costs of pollution, making it economically advantageous to adopt cleaner practices. The two main types of carbon pricing are carbon taxes and cap-and-trade systems. A carbon tax directly sets a price on each ton of CO₂ emitted, motivating emitters to cut emissions to avoid higher costs. In contrast, cap-and-trade systems establish a cap on total emissions and allow companies to buy and sell emission permits, creating a market-driven approach to emissions reduction.
In cap-and-trade, companies with lower emissions can sell their excess permits to those struggling to stay within limits, incentivizing innovation and efficiency. Carbon pricing mechanisms encourage investment in renewable energy, energy efficiency, and low-carbon technologies, as reducing emissions becomes financially beneficial. Revenue from carbon pricing can be used to fund climate adaptation projects, green infrastructure, and support for affected communities. Carbon pricing also helps level the playing field for businesses that prioritize sustainability by making polluters pay for their environmental impact. Some regions implement border carbon adjustments, which apply carbon pricing to imported goods to prevent "carbon leakage" and protect domestic industries from unfair competition.