Putting a price on carbon consists in applying a cost to carbon emissions to encourage polluters to reduce them. It is a market mechanism designed to factor-in the cost of carbon emissions into the price of the products and activities that generate these emissions.

A price on carbon helps shift the burden for the damage back to those who are responsible for it, and who can reduce it. By making sure that the costs of carbon – costs that the public pays for in other ways, such as damage to crops and health care costs from heat waves and droughts or to property from flooding and sea level rise  – are no longer external and unaccounted for by the emitters, the goal is to drive emissions down and foster investment in clean energies and low-carbon practices.

Carbon pricing can be implemented through various market mechanisms, the efficiency of which depends largely on the characteristics of the market and how stringent the pricing system is.

All the same, market solutions are not everything. Carbon pricing will not suffice to ensure that the world curbs greenhouse gas emissions to the levels and at the speed required to limit global warming to a 2°C increase. History shows that at times, polluting remains the most profitable option even when polluters are made to pay for it. This is why regulations, other financial incentives (such as public subsidies) and non-market measures are essential to shift rapidly to decarbonised economies and development pathways in Africa.

Main types of carbon pricing

  • Emission Tradity Systems (ETS) 

Sometimes referred to as a cap-and-trade system –, an ETS caps the total level of greenhouse gas emissions and lowers the cap over time. Companies are allowed a limited, and falling, number of emissions permits. Those industries with low emissions are able to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget.

  • Carbon tax

This measure directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.

The choice of the instrument will depend on national and economic circumstances.

Carbon pricing in Africa

South Africa is the only African country currently preparing to implement a carbon pricing system in the form of a carbon tax.