Carbon dioxide is arguably the most complex externality problem faced by today’s markets. Economic theory dictates that a social cost must be applied to this pollutant to bring markets to their true equilibrium and discourage further emissions that lead to climate change. This paper takes a look at various carbon pricing experiments at all levels of government and in private markets as well. It begins by defining the carbon problem in terms of disproportionate emissions, disproportionate effects, and uncertainty. Then, a survey of estimates of the social cost of carbon shows how different approaches to the same variables, such as the discount rate and uncertainty, lead to large differences in the final estimates. A discussion on mandate markets, specifically carbon taxes and trading schemes, identifies common factors for successes and failures. Finally, an analysis of the carbon offset market considers the validity of a voluntary market for carbon pricing. The paper concludes with suggestions for carbon pricing policies in the United States.
