The global effort to mitigate climate change has paved the way for new cutting-edge solutions to come into play in hopes of diverting our trajectory away from a potentially dystopian future. Carbon pricing is one such solution. It is an instrument that creates accountability by holding polluters responsible for the effects of their emissions by assigning a price to the carbon dioxide they emit. Since the inception of the Kyoto Protocol in 1997, emissions trading programs have taken off around the world. The United States’ Acid Rain Program and the European Union - Emissions Trading Scheme (EU-ETS) were two of the earliest, prominent efforts to put a price on greenhouse gas emissions. In the modern world, carbon pricing mechanisms can broadly be classified into three main types. These are -

1. ETS (Emission Trading System) - ETS allows polluters who find it expensive to cut emissions to purchase pollution allowances from those entities that can afford to slash their carbon emissions. In light of the Kyoto Protocol, which launched the idea of carbon markets, ETS uses ‘carbon credits’ as a currency, which is transacted on various platforms. Sustainiam, as a part of the EU ETS as well as the UK ETS, among only 50 global members, provides this platform in the form of their product, EmX. EmX provides companies access to a digital marketplace where they can trade high quality and credible certificates.
2. ERF (Emission Reduction Funds) - The second type of carbon pricing, ERF, is a scheme that incentivizes emission reduction by offering carbon credits on successful selection at annual auctions. ERF differs from ETS in being a government-funded project, whereas ETS is based on market principles. Currently, Australia is the only country to deploy an Emission Reduction Fund.
3. Carbon Tax - Imposing direct taxes on the emission of greenhouse gases proves to be the simplest way to mitigate excessive emissions. Carbon Tax is the simplest way to administer and provide a rough, predictable price of carbon for businesses looking to invest their funds.

Of the three, the most commonly used is the Emission Trading System. This mechanism has two kinds - cap-and-trade and baseline-and-credit systems.

Cap-and-trade systems aim at creating an absolute limit on emissions, allowing credits to be traded under that limit.

Baseline-and-credit systems, on the other hand, aim at creating an absolute baseline emission level for different entities.

There are over 70 carbon pricing initiatives in motion today, including ETS, Carbon Tax, and ERF’s. Countries have already begun implementing carbon pricing initiatives; these countries include Canada, China, the European Union, India, Japan, Mexico, South Africa, and the United States. The widespread nature of this system has also led to concerns about the equity of putting taxes on carbon. Low-income households are at risk of being affected by the increasing energy prices caused by carbon taxation. Carbon pricing is still an important tool for businesses to ensure sustainable growth of their firms. This mechanism has revealed the important role of incentivising compliance for businesses to work towards a greener future.

As it stands, India does not have a similar nationally regulated carbon pricing mechanism, but instead uses a sector-specific tax on carbon emissions like the coal cess. Broader trends in India’s energy transition with developments in solar and wind energy along with the coal tax, suggest a switch to a full-fledged carbon taxation regime. As the world continues to grapple with the urgent need to reduce emissions and mitigate the impacts of climate change, carbon pricing stands out as a vital tool in the broader toolkit of solutions.