Frequently Asked Questions (FAQ)
General Carbon Pricing
Q: What’s the difference between a carbon tax and an emissions trading system (ETS)?
A: A carbon tax sets a fixed price per tonne of CO2—you emit, you pay that amount. It’s predictable but doesn’t guarantee a specific emission reduction level.
An ETS (cap-and-trade) sets a fixed cap on total emissions and creates tradable allowances. Companies can buy, sell, or trade these allowances. The market determines the price, but emission reductions are guaranteed by the cap.
Think of it this way: Tax = fixed price, flexible quantity. ETS = fixed quantity, flexible price.
Q: Won’t carbon pricing hurt the economy?
A: Evidence from 15+ years of implementation across 80 jurisdictions shows no negative GDP impact when designed properly. British Columbia’s economy grew faster than Canada’s average. The EU saw 60% GDP growth while emissions fell 35%. Sweden, with the world’s highest carbon tax ($130/tonne), has one of Europe’s strongest economies.
The key is proper design, especially revenue recycling—returning money to citizens and businesses offsets costs.
Q: Will carbon pricing make everything more expensive?
A: Some things will cost slightly more (carbon-intensive products), but:
- Revenue recycling means most households get more back than they pay
- Energy efficiency often saves money long-term
- Clean alternatives become more competitive
- Total cost of living can actually decrease (cleaner air = lower healthcare costs)
British Columbia and Canada showed most families came out ahead financially with carbon dividends.
Q: Why not just regulate emissions instead?
A: Regulations have their place, but carbon pricing is more efficient:
- Reduces emissions at lowest cost (market finds cheapest solutions)
- Provides flexibility (companies choose HOW to reduce)
- Generates revenue (can fund climate action)
- Drives innovation (profit motive for solutions)
- Adapts automatically (as technology improves, reductions get cheaper)
Most effective climate policy uses both: carbon pricing for efficiency + regulations for specific problems.
Q: How is carbon pricing different from a “green tax”?
A: Carbon pricing specifically targets CO2 emissions (and other GHGs). Other environmental taxes might target:
- Plastic bags
- Landfill waste
- Water pollution
- Air pollutants (NOx, SOx)
Carbon pricing is broader and more systematic—it affects every decision involving fossil fuel use or emissions.
Implementation & Design
Q: How do you measure embedded emissions in products?
A: Through Life Cycle Assessment (LCA) methodology:
- Direct emissions: Fuel combustion, industrial processes
- Indirect emissions: Electricity use, purchased heat/steam
- Precursor emissions: Raw materials and components
For CBAM compliance, companies use either:
- Actual data: Facility-specific measurements, third-party verified
- Default values: Government-published averages (typically higher)
Q: What’s a “carbon leakage” and why does it matter?
A: Carbon leakage occurs when:
- Country A implements carbon pricing
- Industry moves production to Country B (no carbon pricing)
- Emissions don’t fall—they just move
- Country A loses jobs AND fails climate goals
Solutions:
- Border adjustments (CBAM): Price carbon at border
- Free allocation (ETS): Give some allowances free to vulnerable sectors
- International cooperation: Coordinate carbon pricing globally
CBAM is designed specifically to prevent carbon leakage.
Q: How do countries avoid “free riders” in global carbon pricing?
A: Several mechanisms:
- Trade measures (CBAM): Make non-pricing countries pay at border
- Article 6 (Paris Agreement): Enable cooperation and credit trading
- Competitive pressure: Countries with pricing attract investment
- Reputational pressure: NDC commitments and international scrutiny
The CBAM approach is proving most effective—it makes carbon pricing economically rational even for countries that weren’t planning to implement it.
Q: Can a small country make a difference with carbon pricing?
A: Absolutely! Small countries can:
- Lead by example (Nordic countries showed it works)
- Innovate (test designs others can copy)
- Create markets (demand for clean tech)
- Build momentum (join growing coalition)
Singapore’s carbon tax matters less for its 0.1% of global emissions and more for demonstrating that Asian financial hubs can price carbon successfully.
Revenue & Impacts
Q: Where does carbon pricing revenue go?
A: Varies by jurisdiction, but common uses:
- Direct dividends (Canada, Austria): Equal payments to citizens
- Tax cuts (British Columbia, Switzerland): Reduce other taxes
- Climate investment (EU, California): Clean energy, transit, efficiency
- Social support (Various): Just transition programs, vulnerable households
- Mixed approach (Most): Combination of above
Best practice: Decide revenue use upfront and protect it legally.
Q: How do carbon pricing systems protect low-income households?
A: Multiple mechanisms:
- Progressive revenue recycling: Equal dividends (flat amounts benefit low-income more proportionally)
- Tax credits: Targeted to low-income households
- Energy efficiency programs: Free upgrades, insulation, appliances
- Public transit investment: Improves mobility for non-car owners
- Social programs: Support for heating, transportation
Canada’s carbon dividend gave more to low-income households than they paid in higher costs.
Q: What happens to workers in fossil fuel industries?
A: Just transition programs include:
- Job retraining: Skills for clean energy sectors
- Income support: Bridge payments during transition
- Regional development: Diversify economies of fossil fuel regions
- Pension protection: Ensure retirement security
- Early retirement: Options for older workers
Revenue from carbon pricing often funds these programs. Best implementations start transition support BEFORE job losses occur.
CBAM Specific
Q: I’m a small business importing to EU. Do I need to worry about CBAM?
A: Maybe not! If you import less than 50 tonnes per year of CBAM goods (cement, steel, aluminum, fertilizers, hydrogen), you’re exempt (except hydrogen and electricity).
This exempts 90% of importers while still covering 99% of emissions.
If you’re above the threshold, yes—you need to:
- Get authorized by March 31, 2026
- Collect emissions data
- Purchase CBAM certificates (starting Feb 2027)
Q: What if my supplier won’t provide emissions data?
A: You have two options:
- Use EU default values (safe but expensive—defaults are set conservatively high)
- Find new supplier who will provide data
Most suppliers are learning that providing actual emissions data is worth it—it makes their customers’ CBAM costs lower, making them more competitive.
Q: Can I get credit for carbon prices already paid in my country?
A: Yes! If your country has carbon pricing and you can prove you paid it, you can deduct it from your CBAM obligation.
Example:
- Your product: 2 tonnes CO2 embedded
- EU CBAM price: €80/tonne = €160 owed
- You already paid: $50/tonne in home country = ~€100
- Net CBAM cost: €160 – €100 = €60
This is WHY many countries are implementing domestic carbon pricing—to keep the revenue instead of paying it to the EU.
International Cooperation
Q: What is Article 6 of the Paris Agreement?
A: Article 6 enables countries to cooperate on emission reductions through carbon markets:
Article 6.2: Bilateral agreements between countries to trade emissions reductions Article 6.4: Centralized UN mechanism for carbon credit generation Article 6.8: Non-market approaches (technology transfer, capacity building)
Think of it as: “Country A pays for emissions reduction in Country B, both countries count it toward their climate targets.”
Q: How does Article 6 differ from voluntary carbon markets?
A: Article 6 (Compliance):
- Between governments
- Counts toward national climate targets (NDCs)
- Internationally regulated
- “Corresponding adjustments” required (avoid double-counting)
Voluntary markets:
- Companies buy credits voluntarily
- Doesn’t count toward national targets
- Various standards (Verra, Gold Standard, etc.)
- More flexibility, less regulation
Article 6 is more rigorous and has official international recognition.
Q: Will carbon pricing lead to a “race to the bottom”?
A: Evidence suggests the opposite—a “race to the top”:
- EU CBAM creates pressure to implement domestic pricing
- Early implementers attract green investment
- Clean technology becomes competitive advantage
- Countries copy successful designs
- International linking requires comparable standards
The CBAM effect is accelerating implementation, not undermining it.
Glossary of Terms
Core Concepts
Carbon Pricing: Policy mechanism that assigns a monetary cost to carbon dioxide (CO2) and other greenhouse gas emissions, creating financial incentive to reduce emissions.
Carbon Tax: Fixed price per tonne of CO2 emissions set by government. Emitters pay this rate for each tonne emitted.
Emissions Trading System (ETS): Also called cap-and-trade. Government sets a cap on total emissions and issues tradable allowances. Companies can buy, sell, or trade allowances. Market determines price.
Carbon Credit: Certificate representing the removal or reduction of one tonne of CO2. Can be traded in voluntary or compliance markets.
Shadow Carbon Price: Internal price per tonne CO2 used by companies for decision-making even where no external carbon price exists. Used to prepare for future carbon pricing and identify cost-saving opportunities.
Carbon Leakage: When companies relocate production to countries with weaker climate policies to avoid carbon costs, resulting in no net global emission reduction.
Policy Mechanisms
CBAM (Carbon Border Adjustment Mechanism): EU policy requiring importers to pay for embedded carbon emissions in products from countries without equivalent carbon pricing. Launches fully January 1, 2026.
NDC (Nationally Determined Contribution): Each country’s climate action plan under Paris Agreement, updated every 5 years with increased ambition. Includes emission reduction targets and policies.
Article 6: Part of Paris Agreement enabling international cooperation on carbon markets. Article 6.2 (bilateral agreements), Article 6.4 (centralized mechanism), Article 6.8 (non-market approaches).
Net Zero: Achieving balance between greenhouse gases emitted and removed from atmosphere. Does not mean zero emissions, but emissions balanced by removal/sequestration.
Science Based Targets (SBTi): Corporate emission reduction targets validated by Science Based Targets initiative as aligned with limiting warming to 1.5°C or well-below 2°C.
Technical Terms
MRV (Monitoring, Reporting, Verification): System for measuring emissions, reporting them to authorities, and having them verified by third parties. Critical infrastructure for carbon pricing.
Scope 1 Emissions: Direct emissions from owned/controlled sources (company vehicles, on-site fuel combustion, industrial processes).
Scope 2 Emissions: Indirect emissions from purchased electricity, steam, heating, cooling.
Scope 3 Emissions: All other indirect emissions in value chain—supplier emissions, transportation, product use, waste. Typically 70-90% of total footprint.
Embedded Emissions: Carbon emissions that occurred during production of a good. Also called “embodied carbon.” What CBAM measures.
Carbon Intensity: Emissions per unit of output (e.g., tonnes CO2 per tonne steel, or per unit GDP). Used in some ETS systems like China’s.
Free Allocation: In ETS systems, allowances given free to certain industries (typically at-risk of carbon leakage) rather than auctioned.
Allowance: Tradable permit in ETS representing right to emit one tonne CO2. Companies must surrender allowances equal to their emissions.
Offset: Credit generated from emission reduction or removal project. Can be used to compensate for emissions elsewhere. Subject to quality and additionality concerns.
Additionality: Principle that offset project must result in emission reductions that wouldn’t have happened otherwise. Controversial in some voluntary market projects.
Organizations
UNFCCC: United Nations Framework Convention on Climate Change. International body managing climate negotiations and Paris Agreement implementation.
ICAP: International Carbon Action Partnership. Network of governments with ETS systems, sharing knowledge and best practices.
CPLC: Carbon Pricing Leadership Coalition. Coalition of governments, businesses, and organizations advocating for carbon pricing.
PMI/PMR: Partnership for Market Implementation (previously Partnership for Market Readiness). World Bank program supporting countries to design and implement carbon pricing.
IPCC: Intergovernmental Panel on Climate Change. UN body assessing climate science. Provides authoritative reports on warming, impacts, and solutions.
Market Terms
Certificate: In CBAM, purchased document representing payment for embedded emissions. Based on EU ETS allowance prices.
Registry: Official system tracking carbon allowances, credits, or certificates. Ensures transparency and prevents double-counting.
Auction: Sale of carbon allowances to highest bidders. Primary price discovery mechanism in mature ETS systems.
Linking: Connecting two carbon pricing systems to allow trading between them. EU ETS and Swiss ETS are linked. UK and EU working toward linking.
Price Floor/Ceiling: Minimum or maximum carbon price set by policy. Used to prevent price volatility and provide certainty. UK has both.
Quick Reference Statistics
Global Overview
- 100+ countries with net zero pledges
- 80 operational carbon pricing instruments globally
- 28% of global emissions currently covered by carbon pricing
- $103 billion in carbon pricing revenue generated in 2024
- 2/3 of NDCs include carbon pricing or carbon markets
- 78% of countries indicate they’ll use Article 6 mechanisms
CBAM (EU Carbon Border Adjustment Mechanism)
- €70-100 per tonne: Current CBAM certificate price range
- January 1, 2026: Full CBAM implementation (pivotal year)
- March 31, 2026: Deadline for authorized declarant status
- 50%+ of ETS emissions: CBAM coverage when fully phased in
- 6 sectors covered: Cement, steel, aluminum, fertilizers, electricity, hydrogen
- 90% of importers exempt (under 50 tonne threshold) while covering 99% of emissions
Proven Results
- Sweden: 11% transport emissions reduction with $130/tonne carbon tax
- British Columbia: 5-15% emissions reduction with carbon tax
- EU ETS: 35% emissions reduction since 2005, 60% GDP growth same period
- No negative GDP impact in jurisdictions with well-designed carbon pricing
Climate Context
- 6 of 9 planetary boundaries already breached
- 2.3-2.5°C warming on current trajectory (without additional action)
- 40% of conservation areas on Indigenous lands (receiving <6% of conservation funding)
- $50-100 per tonne carbon price needed by 2030 (High-Level Commission)
- 45% emission reduction needed by 2030 (below 2010 levels)
Implementation Trends
- 2026: Pivotal year (CBAM full implementation, UK BCA announced)
- 2027: UK Border Carbon Adjustment launches
- 2030: Critical deadline for 40%+ emission cuts
- 2050: Target year for most net zero commitments (100+ countries)
- 2060: China, Russia, Indonesia, Saudi Arabia, Kuwait, Bahrain net zero targets
- 2070: India net zero target
Revenue & Investment
- $103 billion generated globally in 2024
- Over 50% earmarked for climate investment and infrastructure
- $2.6 trillion potential annual revenue if all 2024 emissions priced at $50/tonne
- $35 trillion in ESG investment assets globally
Corporate Action
- 7,000+ companies with Science Based Targets
- 2,000+ companies using internal carbon pricing
- 40%+ of global market cap covered by SBTi commitments
- Microsoft: $100/tonne internal carbon fee
- Apple: 100% renewable energy across supply chain goal
Case Studies
Success Story: British Columbia Carbon Tax (2008-Present)
Context: Canadian province implemented carbon tax in 2008 despite strong business opposition.
Design:
- Started at $10/tonne, reached $50/tonne
- Revenue-neutral (all revenue returned via tax cuts)
- Broad coverage (transportation, heating, industry)
Results:
- 5-15% emissions reduction vs rest of Canada
- Economy outperformed national average
- Employment increased (+0.74% annually)
- Political opposition evaporated when results became clear
Key Success Factors:
- Revenue neutrality built public support
- Predictable annual increases ($5/tonne per year)
- Broad coverage with minimal exemptions
- Strong communication about benefits
Lesson: Carbon pricing can reduce emissions and grow economy simultaneously when properly designed.
Success Story: EU ETS (2005-Present)
Context: World’s first major carbon market, covering 27 EU countries + Iceland, Liechtenstein, Norway.
Design:
- Cap-and-trade system with declining cap
- Started with power and industry, expanded to aviation and maritime
- Mix of free allocation and auctioning
- Price floor mechanisms
Results:
- 35% emissions reduction since 2005
- 60% GDP growth same period
- €70-100 per tonne current prices
- Over 50% of power sector emissions covered
Challenges Overcome:
- Initial over-allocation (learned and adjusted)
- Price volatility (added stability mechanisms)
- Carbon leakage concerns (CBAM being implemented)
Key Success Factors:
- Continuous refinement based on evidence
- Predictable long-term cap trajectory
- Willingness to make adjustments
- Strong MRV infrastructure
Lesson: Large-scale carbon markets can work, but require iteration and political commitment.
Warning Story: Australia Carbon Tax (2012-2014)
Context: Australia implemented carbon tax in 2012, repealed in 2014.
Design:
- Fixed price of AUD $23/tonne
- Transition to ETS planned
- Revenue used for renewables and household support
What Went Wrong:
- Political opposition well-organized and loud
- Public confusion about impacts and benefits
- “Carbon tax” branding became political weapon
- Change in government led to repeal
Results:
- Initially effective (emissions falling)
- Repealed after 2 years
- Emissions rose after repeal
- Set back Australian climate policy
Key Lessons:
- Communication matters: Supporters were silent, opponents were loud
- Bipartisan support crucial: Policy vulnerable to political changes
- Branding matters: “Carbon tax” vs “pollution pricing” has political implications
- Lock in mechanisms needed: Protect policy from reversal
Lesson: Effective policy can still fail without political sustainability and public support.
Emerging Success: Singapore (2019-Present)
Context: Small Asian financial hub implementing aggressive carbon pricing trajectory.
Design:
- Carbon tax starting at $5/tonne (2019)
- Aggressive ramp-up: $25 (2024), $45 (2025), $50-80 (2026-2030)
- Covers 80% of national emissions
- Revenue funds green investments
Results So Far:
- Successful implementation without economic disruption
- Strong business compliance
- Positioning as green finance hub
- Regional leadership demonstrated
Key Success Factors:
- Clear long-term trajectory announced early
- Use as competitive advantage (green finance)
- Strong government capacity
- Business engagement in design
Significance: Shows carbon pricing can work in Asian context and financial centers can use climate policy competitively.
News & Updates
Latest Developments (Check website for current updates)
Recent Major Announcements:
- EU CBAM simplifications adopted (October 2025)
- UK confirmed BCA implementation (January 2027)
- China expanded ETS to steel, cement, aluminum (2024-2025)
- Brazil passed SBCE legislation (December 2024)
- Article 6 rulebook finalized at COP29 (2024)
Upcoming Milestones:
- January 1, 2026: EU CBAM full implementation
- March 31, 2026: CBAM authorized declarant deadline
- February 2027: CBAM certificate sales begin
- January 1, 2027: UK BCA launches
- 2030: Critical emission reduction targets (45% below 2010)
Countries Actively Developing Carbon Pricing:
- Turkey (ETS planned)
- India (studying options)
- Indonesia (pilot programs)
- Vietnam (market readiness)
- Egypt (carbon tax development)
To Stay Updated:
- World Bank State & Trends Report (annual, June)
- ICAP Status Report (annual)
- UNFCCC negotiations (COPs)
- CBAM updates (EU Commission)
- This website’s news section
About & Contact
About This Resource
This comprehensive carbon pricing resource was created to provide accessible, accurate, and actionable information about carbon pricing mechanisms, their implementation, and their role in addressing climate change.
Our Mission: Democratize access to carbon pricing knowledge and empower governments, businesses, and individuals to participate effectively in the transition to a carbon-priced economy.
Content Principles:
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Acknowledgments
This resource builds on decades of research and implementation experience from:
- World Bank Partnership for Market Implementation
- International Carbon Action Partnership
- UNFCCC and Paris Agreement negotiators
- Countries and regions implementing carbon pricing
- Businesses pioneering internal carbon pricing
- Academic researchers advancing our understanding
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Disclaimer
Policy Changes: Carbon pricing policies evolve rapidly. While we strive for accuracy, always verify current regulations with official sources for compliance purposes.
Investment Decisions: This resource provides educational information only. Consult qualified professionals for investment, legal, or financial advice.
Jurisdiction-Specific: Carbon pricing varies by jurisdiction. Content may not apply to your specific situation without adaptation.
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Quick Links Directory
Essential Resources
Reports
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For Action
- Science Based Targets Initiative
- Citizens’ Climate Lobby
- [Regional Climate Organizations](Various by location)
Word Count: 4,647 words
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