Carbon pricing — the method favored by many economists for reducing global-warming

emissions — charges those who emit carbon dioxide (CO2) for their emissions. That charge,
called a carbon price, is the amount that must be paid for the right to emit one tonne of CO2
into the atmosphere.[1][not in citation given] Carbon pricing usually takes the form either of a carbon tax
or a requirement to purchase permits to emit, generally known as cap-and-trade, but also
called "allowances".

Carbon pricing seeks to address the economic problem that CO

2, a known greenhouse gas, is what economists call a negative externality — a detrimental
product that is not priced (charged for) by any market. As a consequence of not being priced,
there is no market mechanism responsive to the costs of CO2 emitted. The standard economic
solution to problems of this type, first proposed by Arthur Pigou in 1920, is for the product -
in this case, CO2 emissions - to be charged at a price equal to the monetary value of the
damage caused by the emissions, or the societal cost of carbon. This should result in the
economically optimal (efficient) amount of CO2 emissions. Many practical concerns
complicate the theoretical simplicity of this picture: for example, the exact monetary damage
caused by a tonne of CO2 remains to some degree uncertain.

The economics of carbon pricing is much the same for taxes and cap-and-trade. Both prices
are efficient;[a] they have the same social cost and the same effect on profits if permits are
auctioned. However, some economists argue that caps prevent non-price policies, such as
renewable energy subsidies, from reducing carbon emissions, while carbon taxes do not.
Others argue that an enforced cap is the only way to guarantee that carbon emissions will
actually be reduced; a carbon tax will not prevent those who can afford to do so from
continuing to generate emissions.

The choice of pricing approach, a tax or cap-and-trade, has been debated. A carbon tax is
generally favored on economic grounds for its simplicity and stability, while cap-and-trade is
often favored on political grounds. In the mid-2010s, economic opinion shifted more heavily
toward taxes as national policy measures,[2] and toward a neutral carbon-price-commitment
position for the purpose of international climate negotiations.