The recent economic downturn reduced global greenhouse gas emissions by a scale larger than that seen during the financial crisis of 2009- 10.

This decline was, unfortunately, only temporary, and emissions have already reached pre-pandemic levels. The threat of climate change persists.

Countries in Asia and the Pacific need to plan their recovery over the medium and long-term. In this context, it will be important to reduce emissions cost effectively while safeguarding government budgets.

Carbon pricing is a central element of the broader climate policy architecture and, if designed well, is one solution.

The cost of the damage caused by climate change is not typically incorporated into the price of goods and services, based on the greenhouse gas emissions that they cause.

This market failure results in a lack of incentives to reduce the emissions that cause climate change. Carbon pricing helps address this imbalance. The two-primary carbon-pricing policy instruments are a carbon tax and an emissions trading system.

A version of this article appears in the print on November 11, 2021, of The Himalayan Times.