Why Pricing Carbon Is Still More Theory Than Reality

It’s an idea that’s been around for more than two decades: To slow climate change, make polluters pay for the damage they cause. Worldwide, more than 60 nations, states and cities have adopted what’s known as carbon pricing. The approach is held up by environmentalists, politicians and even many oil companies as an elegant, free-market approach compared with direct regulation. But while the concept may have broad support, the actual working of such systems have proved hugely controversial in Canada, Australia and other countries.

There are two main approaches. In one, carbon prices are set by governments as a tax or fee on carbon dioxide emitted. In the other, governments create a market and an incentive to reduce emissions but let the market’s participants determine the exact price of carbon. Such markets usually cover a select portion of a country’s total emissions, with most charges focused on utilities that produce electricity. The government sets a limit on the total volume of emissions allowed; then permits are either allocated to or purchased by polluters. The credits can be bought and sold, a system known as cap-and-trade.