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Carbon pricing Essay Example

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Carbon pricing

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Carbon pricing policy is a market-based mechanism which 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 carbon tax and cap-and-trade(2012). Carbon tax has been defined as the revenue that the government sets in terms of dollars per unit of carbon dioxide emissions or its equivalent. To be cost-effective, carbon tax needs to cover all sources, which means that carbon price should be set equal to the marginal benefits of emission reduction. The government could apply carbon tax from upstream to downstream of the product cycle of fossil fuels. The cap-and-trade system is defined as the tradable emission allowances which are used by companies to cover their total emissions. Policy makers shall determine the level of the emission cap, the scope of the cap’s coverage, and whether to freely distribute or sell allowances. Cost-containment measures are incorporated in cap-and-trade system, such as offsets, allowances banking and borrowing, safety values, and price collars.There are different options available for designing carbon pricing programs. Tietenberg introduced five existing programs (2013). Swedish Carbon Tax Program, which prices carbon through both direct and indirect way. The direct way is levying a tax on each emitted unit of carbon dioxide, and indirect way is through an energy tax on fossil fuels. After the introduction of carbon tax in the year 1991, the emissions were simultaneously reduced by 50 percent in Sweden. In 2005, the European Union Emissions Trading System (EU ETS) was introduced. In order to avoid double regulation, the government exempted industries that were covered by EU ETS from the carbon tax. However, neither energy nor carbon taxes was applied on electricity production, although households needed to pay special electricity consumption tax.The second program is the British Columbia Carbon Tax Program. British Columbia has levied carbon tax on per metric tonne of carbon dioxide equivalent emissions from the combustion of fuel since 2008, which has affected approximate 77% total greenhouse gas emissions of British Columbia. The carbon dioxide equivalent emissions in this program are defined as carbon

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