Cutting Pollution Is Cheaper Than Paying for the Damage It Causes

This blog post was authored by Chris Costello, EDF Chief Economist

In my last post, I wrote about how you are already paying the (often hidden) costs of climate change. But behind that growing insurance premium or electricity bill is a much bigger number: roughly 53 gigatons (GT) of harmful pollution each year.

Economists have spent decades estimating what it’s worth to avoid a ton of climate pollution. After analyzing a mountain of data from all around the world, the best evidence suggests that the benefit is around $190 per ton. This comes from avoided health costs, lower fire risk, improved labor productivity, and much more. And here’s the striking part: billions of tons of carbon can be reduced for far less than that price tag. That gap represents an enormous opportunity to improve lives at a lower cost than many of us would expect. I think the real task now is designing institutions that allow us to capitalize on it.

The first lesson in making progress is that good intentions don’t scale automatically. Voluntary carbon markets, individual action, and corporate commitments have played an important catalytic role. They are valuable for building momentum and testing new approaches. But a 53 GT problem requires more than voluntary effort alone. It’s time to complement that ambition with enforceable compliance systems that can operate at economy-wide scale. Compliance markets, which are the systems with caps on emissions and enforceable rules, already reduce roughly 1–2 GT per year, yet they cover only over a quarter of global emissions. To move from incremental progress to scaled impact, they must expand and strengthen their ambition.

There’s a lot of misinformation about how carbon markets do and don’t work. Allow me to do some myth-busting. A compliance carbon market begins with a hard cap, like a legally binding limit on total emissions, and allows companies to trade allowances under that limit. If a firm can cut pollution cheaply, it does. If it can’t, it buys allowances from someone who can. That is economy-wide resource allocation in action. For example, a utility that can retire an aging coal plant and replace it with lower-cost wind, solar, and storage will do so and sell its unused allowances. A steel plant facing higher retrofit costs might choose to buy those allowances instead while it transitions more gradually. The cap ensures total emissions fall. The market determines how to achieve those reductions at lowest cost.

Today, roughly 80 compliance markets operate worldwide, covering just over a quarter of global emissions. They are reducing 1–2 GT of emissions per year. That’s real progress — but it leaves most of the 53 GT problem unresolved. We have a giant opportunity to expand and link these systems to reduce climate pollution at scale.

By putting a price on emissions and allowing firms to trade, compliance markets direct capital toward the cheapest reductions first. This is crucial because it ensures affordability and efficiency of every dollar spent, and provides a tangible economic incentive to innovate toward a low-carbon economy. That is their economic advantage: a binding limit combined with cost discipline. It is how we systematically narrow the gap between what pollution costs society and what it costs to prevent it.

The promising news is that some of this is already happening. California has a compliance market where allowance prices trade at around $30 per ton: much lower than the benefit of $190 per ton I talked about earlier. If you look at all 80 carbon markets, the average price is around $19/ton. That spread, a cost of $19/ton vs. a benefit of $190/ton, shows us that many emissions reductions are still available at costs far below the damage those emissions impose on society.

China now operates the world’s largest carbon market, covering more of its own emissions than any other system. It is designing and expanding this domestic system to achieve rapid decarbonization, incentivize innovation, and give rise to an economy-wide energy transition in China. By bringing more of the country’s sectors under its overall domestic emissions cap, lowering the cap over time, and increasing the use of auctioned permits, China is positioning its own emissions to peak in the coming years and decline steadily thereafter.

I’m also optimistic about India, which is just now launching what could become one of the most important carbon markets in the world. Much credit is due to the European Union’s carbon border adjustment mechanism, which is a high-leverage approach to incentivize the EU’s trading partners (like China and India) to strengthen their own carbon pricing systems.

These are not small pilot projects. They are the building blocks of institutional infrastructure designed to deliver billions of tons of emissions reductions and are quickly becoming models for the rest of the world to follow.

Real economic gains emerge when these markets begin to come together. Linking creates gains from trade. Capital flows toward the lowest-cost reductions first, whether they are in New Delhi, Shanghai, or Sacramento. As more and more compliance markets stand up, more linking opportunities will arise, and the overall costs of climate progress will fall.

The reason we are talking about this now is that if we move too slowly, climate damages will eat further into GDP. If we throw the kitchen sink at the problem, we will waste resources, make life unaffordable, and undermine growth. Compliance markets help us strike just the right balance: They reward the cheapest tons first, encourage innovation and adapt as technology improves. When regulators mandate a specific technology, they risk locking in one pathway. A carbon market sets the environmental outcome and lets firms develop the cheapest solutions, including innovations policymakers didn’t anticipate. Quite simply, compliance markets are institutional mechanisms that allow us to align private incentives with public benefit at the scale we need today.

Compliance markets are the backbone of large-scale climate action. But today, the ones that do exist largely ignore what is perhaps our most powerful climate assets: nature. That means we are leaving several gigatons of low-cost reductions on the table. Forests, soils, and wetlands could deliver billions of low-cost tons if we design these markets correctly. And that’s what we’ll explore in the next blog post.