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What is Carbon Pricing, and How Does it Work?

What is Carbon Pricing, and How Does it Work?

As the effects of climate change become more dire, it seems increasingly likely that the United States will follow in the footsteps of countries like Germany, Norway, and the UK, who have already put a price on their domestic greenhouse gas (GHG) emissions. 

During his first few months in office, President Biden rejoined the Paris Agreement and recommitted the U.S. to addressing climate change. On January 27, 2021, Biden issued a memorandum directing federal agencies to use the best available science and data to make decisions about the future of carbon pricing in the U.S., including updating the social cost of carbon (SCC) to guide the regulatory process, which we’ll touch on later in this article.

So what exactly is carbon pricing, and how does it work? Let’s delve deeper. 

What is Carbon Pricing?

Carbon pricing is a method of reducing GHG emissions by placing a financial burden on companies that burn fossil fuels. We know that burning fossil fuels is directly related to the damaging effects of climate change. Carbon pricing incentivizes manufacturers to shift to cleaner practices and, in turn, reduce carbon emissions.

Carbon pricing attempts to answer two questions: (1) How much damage will a ton of carbon dioxide emissions released today cause in the future? and (2) How can those damages be weighed against the costs and benefits of actions taken today?

Calculating the price of carbon boils down to estimating the cost of carbon to society. This is often referred to as the social cost of carbon (SCC). SCC is a complex calculation involving many factors that translates the harm inflicted by the release of one ton of additional carbon dioxide into a present monetary value (e.g., $51 per ton of carbon dioxide emissions). 

The concept of carbon pricing isn’t new. 

The U.S. government began incorporating the social cost of carbon into climate-related regulations in 2010, factoring it into requirements for the fuel economy of cars and trucks, the levels of air pollution from power plants, and the energy efficiency of consumer appliances. But the Trump administration backtracked on these and many other environmental regulations; now the United States has less than a decade left to slash carbon emissions in half to avoid the most disastrous climate impacts, according to the United Nations Intergovernmental Panel on Climate Change.

How Does Carbon Pricing Work?

Putting a price on carbon is extremely complicated, and recommendations on the best approach vary widely. 

Something not in question is this: in order to be effective, governments and emitters must be ambitious with their pricing. The United Nations recommends charging anywhere from $135 to $5,000 per ton, and the IMF is pushing for a global minimum value. In Biden's January 27th memorandum, he signaled the initial estimate would likely be in the range of $51 per ton. 

Stringent climate-related policies can impose direct and indirect costs on manufacturers and consumers. This could potentially result in higher price tags for the next generation of goods like cars and appliances as they’re made to conform to new climate rules. A sudden jump can shock entire markets and economies, and be especially difficult for people who earn lower incomes. Experts advise introducing and increasing carbon pricing gradually to give companies and consumers time to adjust and find cleaner alternatives for manufacturing and transportation.

Federal policymakers have already incorporated the social cost of carbon in the development of scores of regulations. However, some industry leaders have begun to support the idea of explicit pricing mechanisms; a recent study released by Ohio State determined that explicit carbon pricing would be the most economically effective option for the electricity industry, citing regulatory steps and production tax credits as being more expensive and less efficient. 

In preparation for whatever decisions are made at the federal level, many companies have begun incorporating internal carbon pricing into their cost of doing business. Using internal pricing allows companies to identify areas in which carbon pricing would negatively impact profitability, and make carbon-reducing decisions.

How Can HYCO1 Help?

Three things about carbon pricing are clear. 

First, it is inherently political and therefore highly controversial. As long as the U.S. is more liberal than conservative, carbon pricing will be set at higher levels than lower levels. Second, carbon pricing will go up over the next several decades. Whatever carbon price is announced in early 2022, it will only go up from there in the long term because climate change is real and is worsening. Third, if governments, businesses, and consumers are not incentivized to curb their use of carbon, the adverse consequences of climate change will only get worse over time.

No matter what carbon reduction strategy is adopted by the Biden administration, HYCO1’s technology can help reduce the financial burden that emitters will inevitably face.

HYCO1’s partners are able to circumvent the complications of carbon pricing by removing carbon emissions at the outset. In fact, our partners actually see improvements in their bottom lines, as our technology helps them reduce energy costs. 

HYCO1 is the only carbontech company that captures industrial scale CO2 emissions and turns it into high-value, sustainable products.  HYCO1 is also the only company that requires zero upfront costs from its industrial partners. Our breakthrough catalyst and process gives manufacturers a way to turn their harmful CO2 waste from a financial burden into a profitable opportunity that’s better for the planet. 

HYCO1: Carbon Negative. Planet Positive.

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