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We're Putting A Price On Carbon, But Is It Making A Difference?

More than 20% of global emissions are now either taxed or traded. But the question remains: will adding economic incentives to cleaner energy actually work?

Putting a price on carbon emissions is seen as crucial to curbing climate change. And the good news is that much of the world is doing just that (though not the U.S.). A new report from the World Bank identifies 40 national, and 20 sub-national, mechanisms globally.

The European Union, South Korea, Australia, and New Zealand all now have emissions trading systems, or are implementing them. Other countries, like Denmark, Finland, Ireland, Japan, Norway, and South Africa have (or are implementing) carbon taxes. And then there are regional trading initiatives, such are those in California and Quebec.

Altogether, current schemes cover more than 20% of global emissions. And with China, Brazil and Chile all considering carbon trading, the prospect is for far more to be covered—perhaps up to 50%.

"The fact that so many carbon pricing schemes have emerged shows a political will to mitigate greenhouse gases as countries increasingly use carbon pricing to deliver benefits both to our climate and to a sustainable economy," says Joëlle Chassard, of the World Bank’s Carbon Finance Unit. "A transition towards a new generation of carbon markets is in the making."

What is more, the World Bank sees hopeful signs in links between schemes: for example, between E.U. and Australian systems, and California’s and Quebec’s. In time, such relationships could be a "step towards establishing a global carbon market," it says.

And, newer entrants are learning from earlier mistakes. The price of carbon in the EU’s system has collapsed several times, notably during the recession. So, the new schemes are putting in "price floors," or stopping participants from hoarding allowances (a major problem in Europe).

Still, the Bank isn’t exactly confident about averting dangerous global warming—which is the question that matters. "The international community has agreed to limit the increase in average global temperature to 2 degrees Celsius (°C) above pre-industrial levels," it says. "The current level of action puts us on a pathway towards a 3.5–4°C warmer world by the end of this century."

And, the effectiveness of mechanisms like carbon trading remains in doubt. Emissions in Europe—our best test case—have fallen. But this was in a faltering economy, when businesses and individuals use less energy.

A price in itself is meaningless; what matters is the number. So, it’s good news that more of the world is pricing carbon. But we should be wary about banking the outcome.