Carbon Pricing: How Best to Use the Revenue?

Putting a price on greenhouse gas emissions – carbon pricing – is a powerful tool to encourage reductions in emissions and innovations in low-carbon technologies across all sectors of the economy in a market-friendly way. It can also raise considerable amounts of revenue for governments, which in turn raises a crucial question: how should these new revenues be spent?

This Policy Brief examines the arguments for the three main classes of spending proposals. It also discusses the merits of formal earmarking or ‘hypothecation’ of revenues. The pros and cons of different proposals are likely to have different weights in different countries, so this brief concludes with some thoughts about the questions policymakers need to answer before they decide which proposals to adopt.