Pennsylvania on April 23 becomes the first major fossil fuel-producing state in the United States of America to adopt a carbon pricing policy to address climate change.
- It joins 11 states where coal, oil and natural gas power plants must buy credits for every ton of carbon dioxide they emit.
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- The US Government is attempting an approach — known as the social cost of carbon. This approach calculates future climate damages to justify tougher restrictions on polluting industries.
- The Social cost estimate is about $51, meaning every ton of carbon dioxide spewed from a power plant or tail pipe today is projected to contribute to $51 in economic damages in coming years.
- By contrast, emissions were most recently valued at $13.50 per ton at auction under the Regional Greenhouse Gas Initiative in the Northeast, which Pennsylvania is joining.
- A similar “cap and trade” emissions program is in place in California, and one is due to go into effect in Washington state in 2023.
- The social cost of carbon attempts to capture the value of all climate damage, centuries into the future.
- Carbon pricing reflects how much companies are willing to pay today for a limited amount of emission credits offered at auction.
- In other words, the social cost of carbon guides policy, while carbon pricing represents policy in practice.
Carbon pricing mechanism
- According to the World Bank, there are two main types of carbon pricing: emissions trading systems (ETS) and carbon taxes.
- An emissions trading systems (ETS) – sometimes referred to as a cap-and-trade system – caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters.
- By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions.
- The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget.
- A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels.
- It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.
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