Carbon Pricing Mechanisms Compared
Emissions trading, carbon taxes and crediting mechanisms all put a price on carbon in different ways. They also interact in ways that matter for credit buyers.
Emissions trading (cap-and-trade)
An emissions trading scheme sets a cap on total emissions from covered sources. Companies receive or buy allowances and can trade them. The cap gives certainty about the quantity of emissions, and the market sets the price. The EU Emissions Trading System and California's programme work this way.
Carbon taxes
A carbon tax sets a fixed price per tonne of emissions. The price is certain, but the quantity of emissions reduced is not. Taxes are often simpler to administer, and they are used in many countries alongside or instead of trading schemes.
Crediting mechanisms
Crediting mechanisms reward reductions below a baseline, and the reductions can be sold as credits. Offset schemes in trading systems are one example, as are the voluntary standards. Most schemes limit how many credits covered companies may use, to protect the cap.
Border adjustments
A border carbon adjustment applies a carbon price to certain imports, so that imported goods face a cost similar to domestic production. The EU's carbon border adjustment mechanism (CBAM) is the best-known example and affects how traded goods are priced.
How they interact
The same tonne can be covered by more than one mechanism, so schemes include rules to prevent double counting, for example by excluding credits that have already been used elsewhere. For buyers, the practical question is which mechanism a credit can be used under, and whether it has been counted already.