Example
Carbon taxes and emissions trading are common approaches.
The catch
A price is one policy tool and does not resolve every investment barrier.
Related terms
Carbon tax, Greenhouse gas, 1.5°C goal, Climate justice, Conference of the Parties, CSRD
In more depth
Carbon pricing, explained.
Carbon pricing works by making polluters pay for damage that would otherwise land on everyone else, then letting each emitter find its cheapest way to cut. A carbon tax fixes the price and leaves the quantity of emissions uncertain. Emissions trading fixes the quantity through a cap and lets the price move. Many companies run an internal shadow price to test investments before any law requires it.
Design decides who pays and how much changes. Energy takes a bigger share of poorer households' budgets, so the use of the revenue, whether rebates, investment or cuts to other taxes, shapes who bears the cost. Production can also shift to places without a price, known as carbon leakage, which the EU addresses with a carbon border adjustment on imports such as steel and cement. The idea rests on the polluter pays principle. Buying credits voluntarily falls outside the term.