Carbon markets and taxation

A well-functioning carbon market is likely to be a prominent feature in any future mitigation framework. Under the 1997 Kyoto Protocol, 36 industrialized countries committed to cutting their emissions 5 percent below 1990 levels by 2012. To raise the incentives and lower the costs of achieving those reduction emissions targets, the Protocol broke new ground putting in place three innovative market mechanisms: the clean development mechanism, joint implementation and emissions trading. These mechanisms enable countries to access cost-effective opportunities to reduce emissions, or to remove carbon from the atmosphere, in other countries.

The clean development mechanism allows developed nations to meet emissions reduction targets by funding sustainable development projects in developing countries. It entitles investors in projects that reduce emissions to claim carbon credits, which can be counted towards emissions targets in industrialised countries that are Party to the Protocol. While the cost of limiting emissions varies considerably from region to region, the effect for the atmosphere of limiting emissions is the same, irrespective of where the action is taken. The carbon market is already playing an important role in shifting private investment flows, but will need to be significantly expanded to mobilize the investment and financial flows necessary to address climate change.

Another way to fund mitigation measures or to assist research and development in mitigation technologies is through carbon taxes. These taxes mean that demand for fossil fuels is reduced as compared to more environmentally friendly alternatives. DESA serves the United Nations Committee of Experts on International Cooperation in Tax Matters, a global body of independent tax experts. The Committee may have an important role in this area in future, since cooperation to share successful practices, assist in capacity building on administrative issues, and avoid complications such as double taxation of the same emissions may become increasingly important aspects of the practical application and effectiveness of carbon taxes.