A new set of climate-related terms, words and tools are taking over the environmental economy and establishing financial sector instruments to reduce carbon dioxide (CO2) emissions. Carbon finance, carbon banks, carbon pricing and carbon trading are just a few concepts in this climate lexicon. As policymakers continue to debate climate change proposals, they are taking a close look at the market-based solutions and financial tools being used to reduce the carbon footprint.

Here’s a glossary of those terms and tools:

Carbon Finance

Carbon finance is a part of environmental finance that covers financial tools, such as carbon emissions trading, to reduce the impact of greenhouse gases (GHG) in the environment by establishing a price or cost on carbon emissions. Generally, it is a term applied to investments in reducing GHG emission projects and the establishment of financial instruments that are traded on a carbon market.

Carbon Banks

Carbon banks provide financing and funding for green initiatives and climate-
friendly projects.

Carbon Pricing

Carbon pricing places a monetary value on carbon emissions and the costs of climate impacts. Some believe that putting a price on carbon helps to incorporate climate risks into the cost of doing business. There are two main ways to put a price on carbon—a cap and trade system and a carbon tax.

Carbon Market

A carbon market is a system created to buy and sell carbon credits. Under a regulated limit or “cap” on carbon emissions, allowances or credits are given, auctioned or traded to carbon emitters. Businesses or entities that emit below the cap can then trade or sell their extra allowances or carbon credits to those who need additional allowances, thus establishing a market for buying and selling carbon credits.

Carbon Emissions Trading

Carbon emissions trading is a form of trading that targets CO2 and works by setting a calculable limit on the emissions produced by the emitter of carbon emissions.

Carbon Tax

A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Many proposals establish a fee per ton of carbon emissions from a business sector or the whole economy. The businesses or organizations that emit the carbon would be subject to the tax. The goal of a carbon tax is to make visible the “hidden” social costs of carbon emissions. The idea is that CO2 is reduced when prices increase.

With over 25 countries implementing or about to implement some form of carbon tax and 46 other countries or states attempting to put some sort of pricing on carbon—whether through taxes or some sort of trading system—lawmakers in Washington, D.C., are looking at these concepts. Several pieces of legislation and congressional reports encourage or establish a carbon tax or recommend some type of emissions trading system to address climate change. Understanding the impact on the convenience and fuel retailing industry and the financial implications to businesses and consumers will be critical.