How Does The United States Carbon Pricing Work?
The phrase ‘put a price on carbon’ has soared in popularity in countries working to cut down on greenhouse gases emission and drive investment into cleaner options. With the United States ranking third on the list of the biggest polluters in the world, there is a growing consensus that carbon pricing has a great potential as a central part of the U.S. climate policy approach to fight global warming.
Recall that the U.S. President Biden recently made a commitment to the international community that the United States will reduce its greenhouse gas emissions 50-52 percent below 2005 levels by 2030.
What is carbon pricing?
The impact Northeast climate change imposes a huge cost on society as a whole, threatening lives, livelihoods and even our planet. Carbon pricing refers to the process of assigning a financial cost to those responsible for the emissions, providing an incentive to reduce them.
To assign a cost to emissions, governments assess and estimate the external costs of emissions – the costs the public pays for it in different ways – and tie them to the emitters.
Carbon tax vs. Cap-and-trade
Carbon pricing can be implemented into two major ways: carbon taxes and cap-and-trade programs.
This program refers to the imposition of a fixed price on carbon by defining a tax rate on greenhouse gas emissions. The price is usually set per ton of carbon emitted.
Also referred to as an emission trading system (ETS), Cap-and-trade is a program that caps the total level of greenhouse gas emissions and issues limited number of emissions allowances, allowing industries with low carbon footprint to sell their extra allowances to larger emitters.
How carbon pricing works in the United States
The United States adopts the cap-and trade system, as it provides a level of certainty that allows the government set an emission cap. By fixing an emission cap that declines over time, the government can achieve its target of greenhouse emissions reductions. There is currently no national carbon price policy and no U.S. state has a carbon tax.
So far in the U.S., only a handful of leading states have put a price on carbon via cap-and-trade system to encourage lower emissions by businesses, fueling new, low-carbon drivers of economic growth. These states adopted carbon pricing policies either as part of a regional initiative or on their own:
- Eleven states jointly cap power sector emissions through the Regional Greenhouse Gas Initiative (RGGI) – Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia.
- California has an economy-wide cap-and-trade system
- Washington State enacted a cap-and-invest program that will go into effect in 2023.
The RGGI comprises eleven Northeast states looking to cap and reduce carbon dioxide emissions from the power sector, with four states in the PJM Interconnection region participating in the program.
PJM has repeatedly stated that it does not intend to impose a carbon price or policy. It, however, recently conducted a study on the potential impact of carbon prices in the sub-region. The results showed that pricing initiatives established by individual states indicating interest could be accommodated by JPM’s competitive markets, with broader adjustment constraints possibly mitigating the resulting impacts on generation, emissions and price.
In the absence of a nationwide carbon pricing system, many states are considering it as a potential mechanism to key into the Clean Power Plan, which is the U.S. Environmental Protection Agency’s policy to cut down carbon emissions from the energy sector. Also, many companies are taking a stand against climate change by adopting and promoting a price on carbon. Overall, while a lot can still be done, especially at the national level, several states are assuming leadership in embracing carbon pricing.