LIT 4: World Bank what is Carbon Pricing?

Question 1

What is Carbon Pricing?

Answer 1

Carbon pricing is an instrument that
captures the external costs of greenhouse gas (GHG) emissions and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.

Question 2

What is indirect and direct carbon pricing?

Answer 2

1. Direct carbon pricing instruments
   That is, those that apply a price incentive directly proportional to the
   greenhouse gas emissions generated by a given product or activity (primarily
   carbon taxes, ETSs, and carbon crediting mechanisms).
2. Indirect carbon pricing instruments
   Carbon taxes with varying tax rates (per metric ton CO2) across fuels, creating
   non-uniform carbon prices across fuels.

Question 3

What are the main types of carbon pricing?

Answer 3

1. Emmision Trading System
   A system where emitters can trade emission units to meet their emission
   targets. To comply with their emission targets at least cost, regulated entities
   can either implement internal abatement measures or acquire emission units in the carbon market, depending on the relative costs of these options.

Provides certainty about the environmental impact, but the price remains flexible.

Two types of ETC
1. Cap-and-trade
Applies a cap or absolute limit on the emissions within the ETS and
emissions allowances are distributed, usually for free or through
auctions, for the amount of emissions equivalent to the cap.

2. Baseline-and-credit
   Baseline emissions levels are defined for individual regulated entities
   and credits are issued to entities that have reduced their emissions
   below this level. These credits can be sold to other entities exceeding
   their baseline emission levels.
3. Carbon Tax
   Directly sets a price on carbon by defining an explicit tax rate on GHG
   emissions or—more commonly—on the carbon content of fossil fuels, i.e. a
   price per tCO2e.

Guarantees the carbon price in the economic system against an uncertain
environmental outcome.

3. A crediting mechanism

Designates the GHG emission reductions from project- or program-based activities, which can be sold either domestically or in other countries. Crediting Mechanisms issue carbon credits according to an accounting protocol and have their own registry.

These credits can be used to meet compliance under an international
agreement, domestic policies or corporate citizenship objectives related to GHG mitigation

4. RBCF Results-based Climate Finance
   A funding approach where payments are made after pre-defined outputs or
   outcomes related to managing climate change, such as emission reductions,
   are delivered and verified. Aims at environmental protections and reducing
   poverty at the same time.
5. Internal carbon pricing
   A tool an organization uses internally to guide its decision-making process in
   relation to climate change impacts, risks and opportunities.