Carbon Pricing from the Origin to the European Green Deal

Economists have long advocated the widespread use of carbon pricing as the chief policy to combat climate change. Consensus is growing also among governments and businesses on the fundamental role of carbon pricing in the decarbonization of the economy. For governments, carbon pricing can be a source of revenue, which is particularly important in an economic environment of budgetary constraints. Businesses increasingly evaluate the impact of mandatory carbon prices on their operations and use them as a tool to identify potential climate risks and revenue opportunities. Finally, long-term investors use carbon pricing to analyze the potential impact of climate change policies on their investment portfolios, allowing them to reassess investment strategies and reallocate capital toward low-carbon or climate-resilient activities. By and large, carbon pricing takes two basic forms: a carbon tax and an emission trading system. In this chapter, we briefly review these two instruments from a conceptual standpoint. We then review the actual experience with these instruments with reference to European countries and the European Union (EU), the region where those policies have been introduced and implemented first.