There are 75 carbon taxes and Emissions Trading Systems (ETS) in operation worldwide, covering approximately 24% of global emissions.
An ETS, or cap-and-trade scheme, sets a limit on total greenhouse gas emissions. Through this system, emission allowances are granted and emitters who are below their limits are allowed to “sell” their surpluses to those who have exceeded their allocations.
In this way, the emissions level of the entire system is kept constant, while the price of emissions is adjusted by the market.
In an ETS, the volume of planned emissions is determined through emission allowances. However, the carbon price is not set by the market. Examples of jurisdictions that have implemented emissions trading systems include the European Union, the state of California and New Zealand.
Carbon taxes
A carbon tax directly imposes a price on carbon consumption and is administered by governments. This type of tax is easier to administer than a market-based system such as the ETS and generates lower operating costs; however, it is less frequently applied.
In a carbon tax system, the volume of emissions is not precisely planned, although emitters receive economic incentives to reduce it. Instead, the price of carbon is known in advance, as it is set by government authorities.
Examples of jurisdictions that have implemented or are considering a carbon tax include Germany, South Africa and several provinces in Canada.
Climate change
Although most carbon pricing policies have been implemented in high-income countries, they are also making progress in middle- and low-income countries, according to a report by the WTO, World Bank, OECD, IMF and UN.
Many countries also impose energy or fuel taxes, which establish an implicit price on carbon and help reduce GHG emissions. However, several subsidize fossil fuels, creating the opposite incentive. For this reason, reforming these subsidies is key to strengthening carbon pricing and encouraging effective climate action.
Impacts
A U.S. Congressional Budget Office (CBO) study estimated that a $20 per metric ton CO₂ fee would generate about $88 billion in 2012, and that figure could reach $144 billion by 2020.
The effect of a levy of this magnitude on budget deficits varies depending on which deficit projection is considered.