Ive seen them on the news recently but Im confused as to what they actually do. Is it like a tax?
In: Economics
A government sets a total limit on the carbon emissions that the whole country or a single industry can produce, and gives out allowances for emissions to companies. Those companies can’t go over their allowance, but are free to buy and sell those allowances between each other. If one company can produce $1,000 of value from 1 ton of CO2, and another company can produce $500 while emitting 1 ton of CO2, company 1 might buy credits from company 2 for $750. Both make more money than they otherwise would, and the total value gained from that carbon emission is maximized.
Some governments don’t just give out credits at the start, but auction them off, the price of which averages to the same market value, and gives revenue to the government (usually used to pay for climate/pollution programs). Either way, the government imposes a cap on the total emissions, and ideally slowly reduces that cap every year. The buying & selling of credits doesn’t change the total emissions, it just makes their use more money-efficient.
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