Q1. With reference to carbon pricing mechanisms, consider the following statements:
- A carbon tax and an emissions trading system (ETS) both seek to attach an economic cost to greenhouse-gas emissions, but they do so through different market mechanisms.
- Under an ETS, the total quantity of emissions can be constrained through a cap, while the market determines the price of emission allowances.
- Recognition of an overseas carbon-pricing scheme for CBAM purposes necessarily amounts to recognition of that country’s carbon credits as equivalent to the importing country’s emission allowances.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a)
Explanation:
- 1 is correct: A carbon tax directly imposes a price on emissions, whereas an ETS creates tradable emission allowances, allowing the market to determine their price.
- 2 is correct: In a cap-and-trade ETS, the regulator can determine the overall emissions cap, while allowance prices emerge through trading.
- 3 is incorrect: Recognition of an overseas carbon-pricing mechanism for CBAM price relief does not automatically mean that its carbon credits are legally or technically identical to the importing country's allowances.
