Putting a Price on Carbon

This chapter explores the critical role of carbon markets in mitigating greenhouse gas emissions and aligning corporate strategies with global decarbonization goals. It examines key carbon pricing mechanisms, including compliance markets like the EU Emissions Trading System (EU ETS), voluntary carbon markets (VCMs), and indirect signals such as fuel excise taxes and fossil fuel subsidy reforms. Compliance markets, characterized by legally mandated caps and trade systems, incentivize innovation while posing challenges like price volatility and regulatory uncertainty. In contrast, VCMs offer firms flexibility to achieve sustainability goals through carbon offsets but face credibility concerns around additionality and greenwashing.The chapter highlights the financial implications of carbon pricing for firms, including its impact on cost management, investment planning, and access to capital. It discusses the role of hedging strategies and long-term scenario planning in addressing price volatility and regulatory risks. Additionally, it evaluates the complementary role of indirect carbon pricing policies in shifting economic incentives toward low-emission technologies.Through a corporate finance lens, the chapter emphasizes the need for firms to balance immediate compliance obligations with long-term sustainability investments. It concludes that carbon markets are not merely regulatory tools but transformative mechanisms driving innovation, reducing financial risk, and supporting the transition to a low-carbon economy.”