Signatories to the Kyoto Protocol have pledged to reduce carbon emissions in order to mitigate the effects of future climate change. Producers of greenhouse gases pay for the energy they use, but do not pay the economic implications of future climate change, which will be paid by future generations. Carbon taxes and carbon trading aim to ensure carbon emitters pay the ‘true’ cost of their actions today. Under a tax, emitters are incentivised to reduce their carbon footprint, as the more carbon they produce, the more tax they pay. Under a trading scheme, emitters are granted a permit to produce a certain amount of carbon, and if they reduce their emissions below that cap, they can trade their permit for their unused emissions. If they produce too much carbon, they need to but carbon credits via the trading system from those with unused credits. See also Carbon and Greenhouse Gases.

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