Definition
Carbon Pricing
Carbon pricing puts a cost on greenhouse-gas emissions, via a carbon tax or a cap-and-trade market, to make polluters pay and incentivise cleaner choices.
By attaching a price to carbon, either a direct tax or tradable emission permits (cap-and-trade), governments push firms to cut emissions where it is cheapest. It is a market-based fix for the climate externality.
India is developing a Carbon Credit Trading Scheme and faces external pressures like the EU's carbon border adjustment mechanism (CBAM), which taxes carbon-intensive imports. Carbon pricing increasingly affects Indian exporters in steel, aluminium and cement.
Related terms
- ExternalitiesAn externality is a cost or benefit of an economic activity that falls on third parties not involved in the transaction, such as pollution (negative) or vaccination (positive).
- Pigouvian TaxA Pigouvian tax is a levy on activities that generate negative externalities, set to make polluters or harmful consumers bear the social cost, as India's high GST rate on sin goods like tobacco aims to do.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Tragedy of the CommonsThe tragedy of the commons describes how a shared, unowned resource gets overexploited because each user captures the full private gain from using more, while the cost of depletion is spread across everyone.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.