Climate Talks Put Focus on How Carbon Markets Work, or Don't

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. More than 60 jurisdictions — nations, states and cities — have adopted what’s known as carbon pricing, an approach hailed by environmentalists, politicians and even many oil companies as an elegant, free-market alternative to direct regulation. The concept has broad support from Asia to the U.S. and setting up rules for a global market is a focus of the COP26 climate talks in Scotland. Yet the implementation of carbon pricing has drawn legal challenges as well as complaints from business interests that it kills jobs.

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 establish a limit on the total volume of emissions allowed, create a market and let participants in that market — utilities that produce electricity, most commonly — determine the exact price of carbon. The government sets a limit on the total volume of emissions allowed; permits are either allocated or purchased by polluters. The credits can be bought and sold, a system known as cap and trade.