The adverse gasses
Industrial and manufacturing activity produces greenhouse gasses. These are released into the atmosphere and have negative environmental effects. The accumulation of those emissions is the root case of global warming, whose damages take the forms of heat waves, droughts, flooding, sea level rise, loss of biodiversity, etc. They are also harmful for human health.
Those gasses can be grouped into the category of “CO2 equivalent” emissions. Indeed, carbon dioxide, or CO2 is the first such detrimental gas that one thinks about. However, there are different gasses that have a comparable negative impact. So, “CO2 equivalent” designates different gasses like CH4 (methane) or N2O (nitrous oxide).
The term provides the gas aggregation with a common unit of measurement. So, “one ton of CO2eq” can designate the action of different chemical entities, but having an impact as large as the negative result of one ton of CO2. The purpose is to focus on quantifying the adverse outcome of the different gasses produced by human activity.
Giving a monetary value
Carbon pricing aims at giving a monetary quantification of the sum of damages passed on to society by emitting greenhouse gasses.
First, we examine the different emissions that have a similar effect as CO2. We measure their effect and give it a common unit, in tons. Then the idea is to “convert those tons into economic currency”. To simplify, imagine that the only negative effect of 1 ton of CO2eq is to destroy trees. Say that this quantity of emissions demolishes 3 trees. Each tree costs €25. So, the sum of the cost of all the trees destroyed is €75. Society has to pay €75 to replant the trees destroyed by the ton of CO2eq. This way, we can say that 1 ton of CO2eq is priced €75.
Industrial and manufacturing plants emit CO2eq. In order for them to sustain their activity and keep making profits, they “keep hurting” the environment and human health. It can be seen as unfair for someone to experience those negative externalities, especially if they are not at all connected to the industrial or manufacturing activity. The idea of pricing carbon is to financially compensate society. It makes the CO2 emitters “pay to fix back” the destructive effects of their emissions.
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9. The price drivers
Multiple factors such as the weather, energy prices, or industrial activity can affect EUA prices.
8. The Legislative Frameworks
The EU ETS is rooted in a legislative framework dating back to the early 1990s.