Putting a price on how much carbon dioxide a business emits leads to lower global warming emissions, according to a big study published today.
Researchers from the Australian National University looked at 142 countries and found that those with a "carbon pricing" cut their emissions when the market was introduced.
In a carbon market, the more an industry emits, the higher the bill. Firms have a bench-mark and if they go above it, they pay more. The price of emissions varies according to how much carbon dioxide is being emitted.
Another form of carbon pricing is to tax an enterprise according to how much carbon dioxide it emits from burning coal, oil or gas.
It means that the polluter pays for its pollution.
It is, though, politically contentious because it may increase costs to industry.
The ANU study showed that countries with carbon pricing on average have growth rates of carbon dioxide emissions that are about two percentage points lower than countries without a carbon price.
"Our study finds that about two percentage points appear to be due to the carbon price and the remainder is attributable to other factors - including improving technologies, renewable energy policies and differences in fuel tax rates," according to ANU researcher Paul Burke.
"The message to governments could not be clearer: carbon pricing works, and typically to great effect," the co-author of the study, Professor Frank Jotzo, said.
"Australia's emissions from fossil fuel combustion fell during 2012-14 when the carbon pricing mechanism was in place, then rose again and flat-lined to 2019," he said.
"While a well-designed approach would include complementary policies such as support for low-carbon research and development, carbon pricing should ideally be the centrepiece of any serious emissions reduction strategy in a market-oriented economy", Associate Professor Burke said.
"To get on a low-carbon development model, the evidence suggests that putting a price on carbon is a highly effective way to go."
There is a debate among policy-makers about whether direct government action like banning the burning of carbon fuels or the building of more coal-fired power stations, for example, is effective or whether, on the other hand, using a more market-based mechanism like carbon pricing is a better way forward.
The ANU researchers indicate the market-based mechanism is effective.
The World Bank said: "There is a growing consensus among both governments and businesses on the fundamental role of carbon pricing in the transition to a decarbonised economy.
"For governments, carbon pricing is one of the instruments of the climate policy package needed to reduce emissions. In most cases, it is also be a source of revenue, which is particularly important in an economic environment of budgetary constraints."
The Pope has also spoken in favour of carbon pricing. In a meeting with energy executives last year, he called it "essential" to stem global warming.