There are many ways for governments to provide financial incentives or penalties to encourage companies to reduce their CO2 emissions. Here are a few:-

 CARBON TAX 
Polluting companies pay per tonne of greenhouse gas emissions

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 BASELINE & CREDIT
Polluting companies are paid a reward for reducing emissions

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 CAP & TRADE
Polluting companies are given permits which they can buy or sell

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 FEE & DIVIDEND
Carbon fuels are taxed at source: proceeds distributed to households

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EMISSIONS INTENSITY
Power stations buy or sell permits to emit above a set level per unit of electricity generated

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DO NOTHING
Failure to reduce emissions is the most expensive option of all 

 


CARBON TAX

Polluters are required to pay a fee in proportion to their greenhouse gas emissions. This cost is supposed to provide an incentive for them to seek alternative, cleaner processes. As some industrial processes cannot do this as readily as others, various exemptions are provided. Usually this tax or fee is only applied to businesses above a certain size. This may tempt larger manufacturing companies to move their operations to lower taxing countries.

The money collected by this tax can be distributed to end-users (households) to compensate them for increased prices, or can be used to encourage

The carbon tax applied in Australia under the Gillard government had an immediate effect of reducing emissions - mostly as power generation shifted to use reserve hydroelectric capacity. Emissions rose again when the tax was scrapped, despite an ongoing reduction in power usage due to a manufacturing turn-down and greater energy efficiency.   <back>


TRADING EMISSIONS SCHEME (CAP AND TRADE)

Companies are set a threshold of allowed emissions (usually based on their historic level of emissions), and are issued permits for this level. Companies that wish to exceed their threshold can buy them from others who wish to sell (applying their profit to improving technology to reduce their emissions). Polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society.

This provides more flexibility in the market than a straightforward tax, and sets a knowable level of emissions across the system. International compatibility is facilitated as the market sets the value of the permits.

The Rudd government's EPRS scheme was a form of trading scheme, and the subsequent Gillard carbon tax was designed to be converted to a trading scheme, had it not been abolished by the incoming Abbott government. A number of other countries and smaller administrations (states, cities) have adopted Cap and Trade schemes.  <back>


EMISSIONS INTENSITY SCHEME 

An emissions intensity scheme is based on the amount of carbon dioxide that electricity generators emit for each unit of electricity they produce. A permitted level of CO2 is established, and if power stations produce more than this per unit of electricity generated, they would have to buy permits for the excess. Power stations that have lower emissions intensity would create permits, which they can then sell.

There is no charge for emissions below the set level per unit of electricity.
This therefore increases the cost of electricity from high-emitting generators, and reduces the cost of low-emitting generation, favouring these cleaner sources in the Energy Market.
 
It produces no revenue for the government, so has less effect on the price of electricity to the consumer. This provides less incentive for consumers to cut back on power usage and so would be less effective at reducing overall emissions, but it is likely to be a more popular, and potentially a politically acceptable system. However as at December 2016, the Federal Government has declared that no carbon pricing system of any sort will be considered.  <back>


BASELINE AND CREDIT

In contrast to the Carbon Tax or Cap and Trade systems, Baseline and Credit schemes set a threshold for emissions, and governments provide financial incentives to companies that reduce emissions below the threshold.

Systems of this type include the Australian government's Large-Scale Renewable Energy Target (SRET), and its Emissions Reduction Fund ('Direct Action'). Critics of such systems suggest that this process means that the taxpayer pays polluters, rather than the other way around.

The Carbon Farming Initiative (CFI) which pays incentives to carbon capture systems such as new forestry plantations is another mechanism whereby reduction of atmospheric carbon is rewarded. In some cases, these are activities which would be done anyway.

Effectively, Baseline and Credit schemes are described as voluntary inducements: polluters are free to continue emissions at any level without any penalty (although they forego any incentive payment.  <back>


FEE AND DIVIDEND

Unlike other systems, the proposed Fee and Dividend model prices carbon at its source (mine, gas or oil well or port) rather than at the point of consumption or emission. A set fee per tonne of equivalent emissions, (rising each year) is collected, and the entire amount is pooled and redistributed, regularly, to end users (households), to cover the resultant rise in price of energy and manufactured goods as the cost of the fee is passed on. This increases economic activity and benefits manufacturers who limit their cost increases by improved energy efficiency as well as households that make low-carbon choices. As well as a fee on imported carbon fuels, a tax is also charged on goods imported from countries without a similar carbon fee.

No country has adopted such a scheme, though a limited version of it is in operation in British Columbia. The Gillard Carbon Tax, although imposed on emissions rather than at source, was similar to the extent that a significant proportion of the revenue was distributed to households.  <back>