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The Promise and Problems of Pricing Carbon: Theory and Experience

  • Joseph E. Aldy
  • Robert Stavins

Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17569.

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Date of creation: Nov 2011
Date of revision:
Publication status: published as “The Promise and Problems of Pricing Carbon: Theory and Experience.” Journal of Environment and Development 21(2): 152-180, with Robert N. Stavins, 2012.
Handle: RePEc:nbr:nberwo:17569
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
  2. Annegrete Bruvoll & Bodil Merethe Larsen, 2002. "Greenhouse gas emissions in Norway Do carbon taxes work?," Discussion Papers 337, Statistics Norway, Research Department.
  3. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  4. Stavins, Robert, 2001. "Experience with Market-Based Environmental Policy Instruments," Discussion Papers dp-01-58, Resources For the Future.
  5. Isaac, Morna & van Vuuren, Detlef P., 2009. "Modeling global residential sector energy demand for heating and air conditioning in the context of climate change," Energy Policy, Elsevier, vol. 37(2), pages 507-521, February.
  6. Connor, Jeff & Schwabe, Kurt & King, Darran & Kaczan, David & Kirby, Mac, 2009. "Impacts of climate change on lower Murray irrigation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(3), September.
  7. Stavins, Robert, 2007. "A U.S. Cap-and-Trade System to Address Global Climate Change," Working Paper Series rwp07-052, Harvard University, John F. Kennedy School of Government.
  8. Congressional Budget Office, 2011. "The Effects of Renewable or Clean Electricity Standards," Reports 41451, Congressional Budget Office.
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