• 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.
• “You’re trying to get the price to reflect the true cost to society,” said economist Matthew Kotchen, a former U.S. Treasury Department official now at Yale University. “A more stringent policy would have a higher carbon price.
• A more lax policy would give you a lower carbon price.
• In the most efficient world, economists say the two figures would line up, meaning there would be agreement about what climate change damages will cost and the policies used to address them.
• Emissions from northeastern states would have been about 24% higher if the carbon pricing consortium hadn’t been in place, according to researchers from Duke University and the Colorado School of Mines.
• The carbon auctions also have brought in almost $5 billion that can be used to reduce household energy cost increases and promote renewable energy.
• The consortium began in 2009 — the year of a failed push in Congress to establish a nationwide cap and trade program.
• The bipartisan proposal died amid arguments over cost and whether climate change was even occurring.
• Following lawsuits from environmentalists, President Barack Obama’s administration crafted the social cost of carbon and began including future damage estimates in cost-benefit analyses for new regulations.
• It was used under Obama more than 80 times, including for tightened vehicle emissions standards and regulations aimed at shuttering coal plants.
• President Donald Trump moved to roll back many of the Obama-era rules — and to help justify the changes, the Republican administration cut the social cost of carbon from about $50 per ton to $7 or less.
• The lower number included only domestic climate impacts and not global damages.
• “On its face that might sound okay, but when you think about it, global harms from climate change have implications in the U.S. in terms of the global financial system.

• At the two-day G-20 ministerial meeting on environment and climate change in Italy, developing countries, including India, are expected to raise their concerns over the European Union’s recent proposal on the first of its kind carbon border tax.
• Under this proposal, the 27 EU nations will impose border tax on imports of carbon-intensive goods.
• The tax plan, yet to be legally formalized, will come into force from 2026.
• On similar lines, Democratic lawmakers in USA, introduced a legislation establishing a carbon tariff on certain imports like steel as a means to fight climate change.
• Carbon border tax is the European Union’s sweeping new plan to tackle climate change and if adopted would be the first of its kind.
• It is a carbon tariff on imports from countries that aren’t taking similarly aggressive steps to slash their own planet-warming greenhouse gas emissions.

• Suppose a country tries to impose policies, like Carbon tax, to cut emissions domestically. This will increase the cost of its goods (for ex: steel and cement factories) that will now be at a disadvantage to foreign competitors that are based out in nations having looser environmental rules.
• In such situation steel and cement production shifts overseas to that country where the environmental conditions are liberal, which will enable them to cut costs & increase profits.
• Such an event would undercut the climate policy, since those foreign factories would be emitting just as much or more carbon dioxide elsewhere.
• In theory, a carbon border tax could help prevent that undercutting.
• If factories all over the world that wanted to sell steel, cement, aluminum or fertilizer to the EU had to pay a surcharge for the pollution they emit, they would have incentive to clean up their act too.
• Companies within Europe would have less incentive to shift operations overseas. And, if other countries adopted similar rules, that could put pressure on nations that are reluctant to curb their use of fossil fuels.
• Under the EU’s proposal, importers of carbon-intensive products such as steel, cement, fertilizers and aluminum will have to pay the carbon border tax.
• It will soon be legally adopted by 27 nations as part of the EU’s programme to meet its new climate target of cutting greenhouse gas emission by 55% by 2030 from 1990 levels.

• Different countries deploy different types of carbon pricing on the basis of national circumstances and political realities.
• Under mandatory carbon pricing initiatives, ETSs and carbon taxes are the most common types of instruments which emitting entities follow.
• The choice of carbon pricing is in alignment with the broader national economic priorities and institutional capacities.
• In India there is no specific carbon tax but there are hosts of other mechanisms to limit climate change such as:
• PAT (Perform, Achieve and Trade) Scheme
• Coal Cess
• Renewable Purchase Obligations (RPO)
• Renewable Energy Certificates (REC)
• Internal Carbon Pricing (ICP).

 Different types of Carbon Pricing

• Emissions trading system: Under this mechanism emitters can trade emission units to meet their emission targets. The emitter can either implement internal abatement measures or acquire emission units in the carbon market.
• The two main types of ETSs are cap-and-trade and baseline-and-credit:
• Cap-and-trade systems: Under this mechanism, a limit on the emissions is put and emissions allowances are distributed through auctions for the amount of emissions equivalent to the cap.
• Baseline-and-credit systems: Here a baseline emission level is set 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.
• Carbon tax: Under the mechanism, an explicit tax rate on GHG emissions is set
• Offset mechanism: The protocol predetermines the GHG emission reductions for projects. The emission certificates can then be sold to the emitters who could not meet the emission norms.
• RBCF: Result Based Climate Finance is an instrument through which payments are made after predefined outcomes pertaining to managing climate change.
• Internal carbon pricing: It is an entity which an entity uses internally to guide its decision-making process in relation to climate change impacts, risks and opportunities.

• David Gordon Wilson first proposed a carbon tax in 1973.
• A series of treaties and other agreements have focused attention on climate change. In the 2015 Paris Agreement, countries committed to reducing their greenhouse gas emissions over the ensuing decades.
• Carbon dioxide is one of several heat-trapping greenhouse gases (others include methane and water vapor) emitted as a result of human activities.
• The scientific consensus is that human-induced greenhouse gas emissions are the primary cause of global warming, and that carbon dioxide is the most important of the anthropogenic greenhouse gases.
• Worldwide, 27 billion tonnes of carbon dioxide are produced by human activity annually.The physical effect of CO2 in the atmosphere can be measured as a change in the Earth-atmosphere system's energy balance – the radiative forcing of CO2.
• A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more severe weather events.
• In this way, they are designed to reduce carbon dioxide (CO2) emissions by increasing prices of the fossil fuels that emit them when burned.
• This both decreases demand for such goods and services that produce high emissions and incentivizes efforts to make them less carbon-intensive.
• In its simplest form, a carbon tax covers only CO2 emissions; however, they can also cover other greenhouse gases, such as methane or nitrous oxide, by taxing such emissions based on their CO2-equivalent global warming potential.
• When a hydrocarbon fuel such as coal, petroleum, or natural gas is burned, most or all of its carbon is converted to CO2. Greenhouse gas emissions cause climate change, which damages the environment and human health.
• This negative externality can be reduced by taxing carbon content at any point in the product cycle.Carbon taxes are thus a type of Pigovian tax.
• Research shows that carbon taxes effectively reduce emissions.Many economists argue that carbon taxes are the most efficient (lowest cost) way to tackle climate change.Seventy-seven countries and over 100 cities have committed to achieving net zero emissions by 2050.
• As of 2019, carbon taxes have been implemented or scheduled for implementation in 25 countries,while 46 countries put some form of price on carbon, either through carbon taxes or emissions trading schemes.
• South Africa Finance Minister Pravin Gordhan first announced a carbon tax in 2010 that was to begin in 2015.
• After numerous delays, the tax was finally passed in 2019 and is due to come into effect in 2022.
• The tax is set at R120 (US$8.31) per tonne of CO2 equivalent, with an effective rate of R6–48 (US$0.42–3.32) after accounting for tax breaks.
• The Chinese Ministry of Finance originally proposed a carbon tax in 2010, to come into effect in 2012 or 2013.
• The tax was never passed; in February 2021 the government instead set up a carbon trading scheme.

• As India’s third-largest trading partner, the EU accounted for €62.8 billion ($74.5 billion) worth of trade in goods in 2020, or 11.1% of India’s total global trade.
• India’s exports to the EU were worth $41.36 billion in 2020-21, as per data from the commerce ministry.
• The EU’s March resolution stated that to begin with, by 2023, the CBAM would cover energy-intensive sectors such as cement, steel, aluminum, oil refinery, paper, glass, chemicals as well as the power sector.
• By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand.
• The tax would create serious near-term challenges for companies with a large greenhouse gas footprint–and a new source of disruption to a global trading system already roiled by tariff wars, renegotiated treaties, and rising protectionism.
• It is estimated that a levy of $30 per metric ton of CO2 emissions could reduce the profit pool for foreign producers by about 20% if the price for crude oil remained at $30-40 per barrel.
• Such a mechanism to charge imported goods at borders may spur adoption of cleaner technologies.
• But if it happens without adequate assistance for newer technologies and finance, it would amount to levying taxes on developing countries.
• Richer countries must make good on their promises of technological and financial assistance to enable developing countries to make the transition to low-carbon pathways for growth.
• There is disagreement on whether developed countries have kept their climate finance commitments with conflicting claims from countries, according to this 2021 editorial published in the journal Nature.