Carbon Pricing

Carbon pricing is commonly meant to refer to two main types of climate policy instruments: carbon taxation and cap-and-trade programs. Although a number of economic and technological uncertainties render it difficult to estimate the amount of emissions reductions that can be achieved by a carbon pricing scheme, a carbon pricing scheme must be a foundational part of any effective climate policy. The chapter therefore discusses the legal issues that arise in connection with carbon pricing schemes. Because of its ubiquity and breadth, and because of its capacity to effect fairly large economic changes, a carbon pricing law should enjoy broad political support and, in most democratic countries, explicit legislative authorization. Further, the additional implementation issues involved with establishing a cap-and-trade program require some additional legal planning. For example, many cap-and-trade programs provide for the issuance of offsets, permits created above and beyond the initially established “cap,” by the approval of some project deemed to have somehow reduced emissions. While useful, offsets have proven to be problematic, sometimes rewarding clever emissions accounting rather than actual reductions. Carbon taxation, however, usually involves fewer moving administrative parts, and thus fewer legal issues. As between the two, carbon taxation is less administratively complicated, and the better starting point for climate policy. The chapter describes one carbon tax option to serve as a policy foundation upon which other policies could be added, such as traditional emissions regulations under the Clean Air Act (CAA), if needed. The chapter also looks at the legal issues surrounding how a carbon tax would be designed and implemented.