Carbon pricing is a critical tool to help countries and companies achieve their climate targets by valuing the externality of carbon emissions. Carbon pricing exists as a penalty, subsidy, or valuation of a carbon sink with the key aim of delivering a price signal for investment in the reduction or the removal of carbon. While a simple concept, the universe of carbon pricing is complex due to the breadth of activities, the variety of applications, and further what is a myriad of combinations depending on geographical opportunity and political will. This Energy Insight paper describes some of the basic features of carbon markets, analyses some of the wider consequences and shows why having a one-size-fits-all carbon pricing mechanism – or a ‘single global carbon price’ – is not only not possible, but that heterogeneity in carbon markets is in fact needed, if they are to reach their promised potential.
More specifically, this paper reviews the different types of carbon pricing applications, who determines the specification of a carbon unit, what are the core specifications of a carbon unit, what various types of carbon units exist and how they vary in cost and scale, before discussing Article 6 and how it will underpin global carbon markets.
Authors: Hannah Hauman, Global Head of Carbon Trading at Trafigura, Dr Bassam Fattouh is the Director of the Oxford Institute for Energy Studies (OIES) and Professor at the School of Oriental and African Studies (SOAS) and Hasan Muslemani, OIES-KAPSARC Senior Research Fellow & Head of Carbon Management Research
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