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Issue Brief
2022.05.23
1301

Carbon Pricing Methods

Authors:Jinsu Park
Carbon Pricing Methods
Carbon pricing is a policy that encourages emissions reduction by recognizing greenhouse gas emissions as cost and aims to comply with the polluter pays principle, which holds polluters accountable for their greenhouse gas emissions, and encourage voluntary investment in reduction technologies.

Instead of directly asking companies or consumers to reduce greenhouse gas emissions, it encourages technology development, consumer behavior changes, and investment changes by internalizing cost in economic activities.

Carbon pricing includes the emissions trading system which sets the total emissions permits and allows the carbon price to be determined in the market, internal carbon pricing, which imposes a certain price on emissions, and carbon tax.

This issue brief introduces the following methods to estimate and calculate the carbon price: (1) social cost of carbon, (2) marginal abatement cost, and (3) shadow price of carbon.

  • The carbon pricing method may vary depending on its purpose and use. Currently, there are three types of carbon pricing methods adopted by some countries and international financial institutions: "social cost of carbon" converting damages to be caused by 1 tCO2 of greenhouse gases into monetary value, "marginal abatement cost" to reduce additional 1 tCO2 of greenhouse gases, and "potential carbon price" to incentivize economic actors to reduce greenhouse gas emissions to Nationally Determined Contributions (NDC).

  • The carbon price outlook for different scenarios published by the Network for Greening the Financial System (NGFS) in 2021 provides the shadow price of carbon as a normative carbon price to be set to achieve reduction goals, which is referenced by many research institutes and financial institutions in Korea and abroad.

  • The U.S., UK, and French governments define their carbon prices, taking into account their unique greenhouse gas reduction goals, reduction technology levels, and climate change damages, and reflect the prices in cost-benefit analysis when introducing public projects or policies.

  • While the function of carbon pricing is expected to be reinforced to enhance the Korean economy's resilience to respond to climate change, it is time to examine carbon prices that reflect the level of Korea’s reduction technologies and the uniqueness of policy goals.

#Climate Risk#Carbon Pricing#NGFS#socialcostofcarbon#shadowpriceofcarbon#marginalabatementcost