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 (emissions) 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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 CARBON FEE and DIVIDEND
Carbon fuels are taxed at source or port of entry and proceeds distributed to end users 

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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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CLEAN ENERGY TARGET
Retailers are required to buy certificates , which are only issued to low emitting generators

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 DO NOTHING

Failure to reduce emissions is the most expensive option of all

CARBON (emissions) 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 downturn and greater energy efficiency, as hydro reserves were re-established.  

The proceeds of the tax were returned to the community via income tax reductions, but this was not sufficiently obvious to the voters.  When a later government repealed the tax, the compensation remained, reinforcing the impression that the public was better off without the carbon tax.

For further information see https://en.wikipedia.org/wiki/Carbon_pricing_in_Australia 

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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.  Also, since electricity prices are not affected, there is no incentive for consumers to use less.

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>


CARBON FEE and DIVIDEND

This 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.  The dividend part is that some or all of the revenue 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.

Ref: https://en.wikipedia.org/wiki/Fee_and_dividend 

While the difference of principle between an emissions tax and a potential tax is that the latter is due when the fuel is mined or imported, the more important aspect of the scheme may be in the psychology of the redistribution.  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.  However, the method of redistribution soon led it to pass largely unnoticed by the beneficiaries.  A regular dividend payment would have made it far more popular, and much harder for a later government to repeal.

No country has adopted such a scheme, though a limited version of it is in operation in British Columbia.   <back>

 


CLEAN ENERGY TARGET

A Clean Energy Target (aka Low Emissions Target) is designed to bring down the average emissions of power generation across the country. A target of a certain number of tonnes of CO2 per MWh of electricity would be set. Suppliers (electricity generators) producing emissions below this target would be issued with certificates for electricity they generate. Electricity retailers and industrial users would be required to obtain certificates from their chosen supplier. Heavily polluting generators would not be issued with certificates and so would need to buy them on the market in order to sell their electricity. Thus they would become less price competitive compared with lower-emitting generators.

A CET was the key instrument recommended in the Finkel Review in 2017. It was not implemented.

The scheme produces no revenue for the government so could not be described as a 'tax'. The target level is contentious: 0.6 or 0.7 tonnes CO2e/MWh has been suggested. Australia's average emissions are extremely high by world standards, so an initial target similar to other countries (most developed countries average below 500kg CO2 pe MWh) would be impractical, but a more generous target level would encourage gas and even the very expensive coal-with CCS (Carbon Capture & Storage) plants to be built - possibly gaining quick but short-term limited reductions in total emissions rather than longer-term continued reductions.   <back>