Who sets the price of carbon?
No one. The price of carbon is set by the carbon market. The market is driven by the demand of carbon importers and the supply of carbon certificates. The price per ton of carbon could decrease if industry reduced emissions ahead of the cap. Or, it could increase if industry demand for entitlements exceeded supply. A price floor through a carbon fee provides a long-term price signal to encourage long term investments in low-emitting technologies. What is likely to be the trend in carbon prices? As the carbon budget (and hence the number of shares) declines from year to year, it is likely that the price of carbon will rise. Less pollution will yield more cash to residents. This creates a built-in incentive to reduce emissions over time.
