Carbon pricing is recognized as the most efficient tool to tackle climate change and therefore is fundamental for the transition to a decarbonized economy. It is an instrument that captures the external costs of greenhouse gas emissions and ties them to their sources through a price, usually in the form of a price on the emitted carbon dioxide (CO2).
From a government’s point of view, carbon pricing is both an instrument to reduce emissions and a source of revenue to finance the transition to lower carbon options. Businesses, on the other hand, use it to evaluate the impact of mandatory carbon prices on their operations and as a tool to identify potential climate risks and revenue opportunities. Investors, in turn, can find carbon pricing useful to assess the potential impact of climate change policies on their investment portfolios.