What is Carbon Pricing?
Carbon pricing is meant to address a market failure. The external costs of emitting CO2 are not accounted for in the pricing of products and services. For example, the price of gasoline is typically arrived at by accounting for the cost of extracting the oil, refining that oil, and transporting it to the various gas stations, as well as other aspects of supply and demand. However other costs are not accounted for, such as the health costs from increased pollution, or costs of extreme weather from climate change. These costs tend to seem abstract, but they are increasingly becoming more apparent. A New York Times article points out that Miami plans to spend $400 million to raise streets and install water pumps to mitigate the effects of rising sea levels. Other coastal cities from Charleston to New York plan to spend a combined total of over $20 billion dollars on similar resiliency projects. These are external costs of emitting CO2 that are not accounted for and are now being placed on taxpayers.
There are Two Types of Carbon Pricing Cap and Trade
The first type is an emissions trading system, also known as cap and trade. Cap and trade focuses on creating a carbon budget, or “cap” to set the limit on emissions produced. The cap is then broken down into allowances, also known as permits or carbon credits, and distributed or sold at auction to power plants and other big polluters. Each carbon credit allows power plants to emit one ton of CO2. If a power plant uses up all of their carbon credits, they either need to purchase additional carbon credits at auction or from other power plants who have extra. In theory, if the total cap was reached and there were no more carbon credits available, the power plant would have to stop emitting CO2 all together.
- By setting a cap, it is very easy to set specific emissions reduction goals.
- If carbon credits are sold to power plants, that revenue can be used to fund clean energy projects, as is done by the Regional Greenhouse Gas Initiative.
- It is difficult to predict the effect that the cap will have on the price of carbon.
The second type is a carbon tax. A carbon tax is exactly what it sounds like: a tax levied by the government on the production, sale, or use of fossil fuels. The goal of the tax is to make fossil fuels and the products that use them more expensive, and encourage businesses and consumers to switch to greener alternatives.
- With a set tax policy, it is very easy to predict price outcomes, and thus businesses and consumers can easily plan for future costs.
- Revenue raised by the tax can be used to fund green energy projects, or paid out as a dividend to citizens.
- It is difficult to predict what the effect a specific carbon tax will have on levels of CO2 emissions.
- Without a global price on carbon, some argue that companies would simply move specific carbon intensive operations to “carbon havens”.
- The idea of a tax is politically unpopular and difficult to pass.
What Are Carbon Offsets?
“Carbon offsets” tends to be a catch-all term for tradeable carbon reduction financial products. So what does that mean? Basically, a carbon offset is a measured, and certified reduction of CO2 emissions, that can be purchased by individuals and companies to offset their own carbon emissions. Carbon offsets tend to be used for voluntary commitments to carbon reduction. For example, say an organization has publicly made a commitment to reduce their carbon emissions by 50% by 2020. They may be able to get 80% of the way there by making their operations more energy efficient, installing solar panels on their buildings, etc., but can’t quite get to the full 50% reduction. To fill in the gap, the organization can purchase carbon offsets to fund carbon reduction elsewhere. Carbon offsets come in many forms. Carbon offsets can include, but aren’t limited to:
- A carbon credit bought from a cap-and-trade system that is retired (taken out of circulation), thereby preventing a power plant from using the carbon credit to produce future emissions
- A tree-planting project that has been certified and measured to absorb a certain amount of CO2
- A renewable energy project that replaces an emissions-intensive power source
- Carbon offsets provide a way for companies and individuals to lower their carbon footprint quickly.
- Carbon offsets provide essential funding for carbon reduction projects.
- Carbon offsets can be difficult and expensive to certify against greenwashing.
- Carbon offsets can allow companies to become complacent in reducing the carbon footprint.
- There can be problems of additionality, where carbon reduction from a carbon offset is counted twice. For example, say a university develops a reforestation project that sequesters 25 tons of carbon and claims publicly that they’ve reduced 25 tons of CO2. They then sell carbon offsets from that project to a clothing company, who also claims they’ve reduced 25 tons of CO2. Combined, these organizations are claiming to have reduced 50 tons of CO2, but only 25 tons have actually been sequestered.
What is the Best Way to Reduce CO2?
Economists agree that a carbon price is the most effective way to lower CO2 emissions, but the best way to implement that carbon price is still a matter of debate (Guardian). Many people look at cap and trade as inferior to offsets from reforestation or other sequestration projects because, sequestration is actually removing CO2 from the atmosphere, while carbon credits are simply removing future emissions. This is a very understandable conclusion, however carbon pricing in the form of cap and trade or even a carbon tax is actually more important in the grand scheme of creating a sustainable energy future. In addition to having a limited amount of carbon credits, every year the amount of carbon credits that are available is reduced, therefore reducing the amount of CO2 that is emitted into the atmosphere over time. This way, cap and trade pushes industry to make a systematic shift away from carbon intensive energy production, while offsets from sequestration simply remove CO2 without addressing the greater problem of CO2 production. That’s not to say sequestration isn’t important, because it is, but it’s kind of like if we were trying to drain a swimming pool using a coffee mug, and meanwhile there is a fire hose blasting water into the pool. Unless we turn off the fire hose, the mug isn’t going to make much of a difference.
So How Does Soli Fit Into This?
Now that you know the basics of carbon pricing, you might be wondering where Soli comes in, so let’s go back to the idea of carbon credits. After you download the app and sign up, for every dollar that you spend at participating merchants, Soli earns a commission from those merchants. Soli then uses that commission to purchase and retire carbon credits from the available pools (such as the Regional Greenhouse Gas Initiative). This way, you are helping “destroy” two pounds of carbon dioxide with every dollar you spend. Watch this video for more information on how Soli works and what kind of impact we can make together.