Well-designed carbon pricing is an efficient policy for reducing greenhouse gas emissions. Putting a price on carbon influences energy consumption and investment decisions while also creating a revenue stream that can be reinvested to accelerate the clean energy transition, grow the economy, and support programs that reduce pollution and energy burdens in low-income communities.

Without a carbon price, economic decisions undervalue the true public health and environmental costs of emitting activities and investments. Though carbon pricing can be a powerful tool, it is not a silver bullet for rapidly reducing emissions. Because consumers are sensitive to energy prices, there can be political liabilities associated with carbon pricing, which often means prices are set too low. In addition, not all sources of emissions are responsive to pricing policies.

These weaknesses mean carbon pricing policies are best deployed as part of a package of strong climate policies that also includes standards and incentives. A carbon price may be set either directly as a carbon tax, levied directly through a per-unit charge on emissions, or indirectly as a cap-and-trade program, requiring that emitting sources acquire permits to cover their emissions and reducing permit availability over time.

Carbon pricing best practices have moved toward a hybrid approach. For example, California’s cap-and-trade program reduces emissions through declining caps while ruling out price extremes via ceilings and floors on permit prices. A hybrid carbon tax would rachet up the price in response to emissions falling too slowly.

More than 60 countries and regions have adopted some form of a carbon pricing program, including California, China, and the European Union. Energy Innovation research helps inform new and existing carbon pricing policy design to ensure efficient emissions reductions and to share lessons learned in California and elsewhere with other regions.