Calibrating emissions pricing

While the need for pricing carbon dioxide emissions is clear, its calibration is not. Two concepts for emissions pricing are cost-effectiveness consistent with a quantitative emissions target and the social cost of carbon dioxide emissions. This chapter examines their empirical foundations. They include the long-run marginal cost of abatement consistent with the target, recognizing that it subsumes some inherent uncertainties in the social-cost approach. Substantial inherent uncertainties in social costs and benefits drive a vast range of estimated social costs of carbon emissions, which is also examined. It is argued that a quantitative emissions target cost effective emissions pricing provide a more stable and informative focal point for government policies and long-run investment choices of businesses and households. Nevertheless, actual emissions pricing falls short of the levels and scope deemed adequate by either framing, though countries with more ambitious pricing benefit from low-carbon legacies such as hydroelectric and nuclear power.