What is carbon pricing and name two policy instruments used to implement it.

• A. Carbon pricing sets a price on CO2 to incentivize reductions; instruments include a carbon tax and cap-and-trade.
• B. Carbon pricing is a subsidy for fossil fuels; instruments include feed-in tariffs and tax credits.
• C. Carbon pricing is a ban on CO2 emissions; instruments include outright prohibition and mandates.
• D. Carbon pricing is a grant program for carbon capture projects; instruments include direct grants and loans.

Answer: (C)

Carbon pricing works by attaching a monetary value to emitting CO2, creating a price signal that motivates emitters to cut emissions, switch to cleaner options, or invest in efficiency. This approach uses market incentives rather than outright bans, allowing reductions to occur where they are most cost-effective.

Two common ways to implement this price are:

• A carbon tax, which sets a price per ton of CO2. Emitters pay that tax for the emissions they release, providing a predictable cost signal. Revenue from the tax can be used to reduce other taxes or fund clean-energy programs, and the price can be adjusted over time to steer long-run behavior.

• Cap-and-trade, which puts a limit on total emissions (the cap) and issues allowances equal to that limit. Firms must hold enough allowances to cover their emissions, and they can trade allowances with others. The market determines the price, and the cap is gradually tightened to drive deeper reductions.

Other tools like subsidies, outright bans, or grants do not price emissions directly. Subsidies encourage certain activities without charging for emitting, bans prohibit emissions, and grants support specific projects without a system-wide price signal.