The International Panel for Climate Change

The 2°C target as a global stabilization target range guides today’s international climate policy. To limit warming below 2 °C, it requires substantial emission reduction in the next few years to come. In order to reduce emissions of greenhouse gases, carbon pricing as a market-based instrument was most favored by economists and widely used in many countries. The rationale of carbon pricing is charging those who emit greenhouse gases into the atmosphere. Carbon pricing usually includes a carbon tax, cap-and-trade or a combination of both. This paper will first introduce the concept of carbon pricing then look at five popular carbon pricing programs. The strengths and challenges of carbon pricing will also be discussed. The main strengths of carbon pricing are reducing greenhouse gas emissions, cost-saving, and inducing technology innovation. The major challenges facing carbon pricing are carbon leakage, uncertainties, and distributional effects. Then, the next part of the paper shall focus on the future development of carbon pricing. The paper shall be concluded after discussing the implementation of other policies to accompany the policy of carbon pricing in order to limit the emission of carbon dioxide.
The carbon pricing policy is a market-based mechanism that flexibly meets objectives and contains incentives for companies to develop more effective and sustainable instruments in order to contribute to the environment (Szijarto, 2012). Carbon pricing includes two policy approaches: carbon taxation and emissions trading (cap-and-trade). Aldy and Stavins gave the definitions for the carbon tax and cap-and-trade(2012). The carbon tax has been defined as the revenue that the government sets in terms of dollars.

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