Vol. 5 No. 1 (2022): Economic Review of the European Union

Climate change presents an unprecedented global challenge, and the 2015 Paris Agreement has reinforced the urgency of adopting effective strategies to reduce greenhouse gas (GHG) emissions. Among these strategies, carbon pricing mechanisms have emerged as one of the most effective and economically efficient tools for incentivizing emissions reductions and accelerating the transition to clean technologies.

There are two primary approaches to carbon pricing: carbon taxes and emissions trading systems (ETS). A carbon tax sets a fixed price per ton of CO₂ emitted, providing price stability for investors but without guaranteeing a specific level of emissions reduction. In contrast, an ETS, also known as a cap-and-trade system, establishes a total emissions cap and allows companies to trade allowances, ensuring that emissions remain within the limit but with greater price volatility. Both mechanisms have advantages and challenges, and their effectiveness depends on policy design, regulatory enforcement, and economic conditions.

As carbon pricing mechanisms expand globally, carbon market integration has gained attention as a way to enhance cost efficiency, increase market liquidity, and reduce the risk of carbon leakage. Market linkages allow for the cross-border trade of emissions allowances, ensuring that reductions occur where they are most cost-effective. However, integrating carbon markets requires overcoming regulatory differences, political resistance, and concerns over economic competitiveness.

This study provides a comparative analysis of carbon pricing effectiveness across key jurisdictions, including the European Union (EU), the United States (US), China, Canada, and emerging markets. It examines the strengths and weaknesses of carbon taxes versus ETS, evaluates real-world implementations, and explores the challenges of market integration.