Free markets can lead to market failures. Carbon emissions are one well-recognised example of market failure through the creation of significant externalities - where the gains (profits) are privatised, and the downsides are public (and disproportionately affects the poorest parts of the world).
Carbon pricing is a regulatory mechanism (a tax) to make polluters pay for the damage they cause to the environment. Instead of telling polluters how to reduce emissions, it gives them a choice: cut down emissions, stop polluting altogether, or keep polluting and pay a price. This encourages countries to opt for cleaner technologies and provides a mechanism to dynamically price carbon. As a price mechanism, it can be optimised for socio-economic and political contexts, and proceeds from this ‘tax’ can be used to subsidise costs for poorer sections of the population.
There are two main options for carbon pricing:
An Emission Trading System (ETS) that sets a limit on emissions and lets companies trade permits (raising concerns around outsourcing emissions in this globalised world). Companies with low emissions can sell their extra permits to bigger polluters. This system creates a market for emissions and can nudge aggregate emissions are on a glide path.
A carbon tax that directly puts a price on carbon emissions. It's like a levy on pollution by increasing say the retail price of gasoline.
Europe seems to be faring quite well, and on track for their ‘net zero’ target. Here is a report from The Economist:
Emissions fell by a steep 15.5% in 2023, largely driven by reductions in carbon from electricity generation and industry. EU countries added 17 gigawatts (gw)-worth of windmills and covered roofs and fields with 56gw of new solar panels…The commission’s modelling suggests that current policies should get the bloc to an 88% reduction of overall emissions by 2040, compared with 1990 levels. With the 2030 target of a 55% reduction within reach, the EU should be able to agree to a target for 2040 of 90%. The main target, to get to net zero by 2050, is unchanged.
The article credits ‘carbon prices’ for much of this reduction in emissions, through the use of their Emissions Trading System. Carbon pricing, when applied correctly (on the right target sectors, in the right geographies) can make a difference.
See the graph below from OECD. The graph shows ‘Effective Carbon Rates’ (ECR) - that’s the sum of carbon taxes, permit prices resulting from emissions trading systems and fuel excise taxes for G20 countries.
The United States continues to be a laggard among industrialised nations, and even compared to the G20 average. A regrettable outlier, in fact. If Donald Trump comes back to power, there is hardly any hope on this front.
Great that you are raising this issue, and I agree that the US should be doing more on carbon pricing. Alas even though emissions trading was born in the US, political decisions have brought them down the industrial policy route, e.g. the Inflation Reduction Act (IRA).
The effective carbon rate (ECR) should also include where governments put a price on carbon indirectly through gasoline and diesel taxes, fossil fuel heating levies, and renewable energy price premiums, etc. It should also include negative carbon pricing, i.e. when production and consumption of fossil fuel is subsidised.
Lastly, while carbon pricing coverage is important you also need to consider the price of carbon. You might have 100% coverage of emissions but if the price is very too low then it won't make a difference.
You talk about market failure but in South Asia and most of the developing world, government failure is much more common than market failure.