Carbon pricing is a mechanism that captures the external costs of greenhouse gas (GHG) emissions and ties them to their sources through a price, mostly in the form of a price on the carbon dioxide (CO2) emitted. The public usually pays for costs of damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise. These costs called as the external costs. A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it.

The carbon pricing mechanism is expected to motivate high polluting companies to reduce emissions and to decide, to either transform their activities and lower their emissions, or continue emitting and paying for their emissions. More than 40 countries such as the US, Canada, Australia, the UK, France, have been putting the price on carbon dioxide emissions. Determining an adequate price on GHG emissions is a way to internalize the external cost of climate change in the broadest possible range of economic decision making. It was designed to reshape the financial investments that can stimulate clean technology and market green innovation, and transfer to low-carbon drivers of economic growth. The main purpose of Carbon Pricing itself is to prevent the use of fossil fuels that emit carbon dioxide to protect the environment, overcome the causes of climate change both nationally and internationally.

Carbon pricing is implemented with some goals. For governments, as Kyoto Protocol signatory, carbon pricing is one of the instruments of the climate policy package needed to reduce emissions. In most cases, it can be a source of revenue, which is particularly important in an economic environment of budgetary constraints. So, businesses use internal carbon pricing to evaluate the impact of carbon prices on their business operations and to identify potential climate risks and revenue opportunities in the long term. Finally, long-term investors use carbon pricing to reassess investment strategies and reallocate capital toward low-carbon or climate-resilient activities.

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