Global carbon pricing: moving from fragmented policies to a unified framework

Global carbon pricing: moving from fragmented policies to a unified framework

As the world struggles with the urgent need to reduce greenhouse gas emissions, carbon pricing has emerged as a crucial strategy to drive decarbonization. By putting a price on carbon emissions, these mechanisms incentivize businesses to lower their carbon footprint. A carbon tax imposes a specific cost on carbon emissions, usually based on the carbon content of fossil fuels. Unlike an Emissions Trading System (ETS), it sets a fixed price for carbon, but the exact reduction in emissions is not guaranteed. This blog post delves into the global carbon pricing landscape, starting with the EU ETS as a foundational example, and explores how various regions are adopting or enhancing their carbon pricing schemes.

The EU emissions trading system (EU ETS): a benchmark for carbon markets?

The EU ETS is the pioneering carbon market and was the world's largest (until China implemented theirs in 2021), covering around 40% of the EU’s total emissions. It operates on a cap-and-trade principle, where the total amount of greenhouse gases that can be emitted by sectors like power, manufacturing, and aviation is capped. Companies receive or buy allowances, which they can trade if they exceed or reduce their emissions below their allocated amount. This system has significantly evolved since its launch in 2005. Initially plagued by an oversupply of allowances that kept prices low, the introduction of the Market Stability Reserve (MSR) in 2019 has helped to stabilize prices by adjusting the supply of allowances based on demand.

Global carbon pricing landscape: a patchwork of policies

While the EU ETS is a robust model, the global carbon pricing landscape is diverse, with 75 carbon taxes and ETS in place worldwide, covering about 24% of global emissions. The figure below illustrates the fragmented landscape, depicting cities and states with active carbon pricing mechanisms (ETS and carbon taxes) and corresponding prices per tCO₂e (excluding the EU ETS price of around 73 $/ tCO₂e on 26 September 2024).

 

Figure 1: Carbon prices in USD$ per tCO2e (on 1 April 2024) for ETS and carbon taxes on city or state level[1]

Key observations from the global carbon pricing maps:

• Europe: The EU ETS is a comprehensive system covering multiple countries, yet some EU member states, like Sweden and France, have additional national carbon taxes (see map below) that operate alongside the EU ETS. These national taxes mostly cover the sectors not included in the EU ETS.
• North America: The map above shows separate circles for cities or states with separate carbon pricing schemes like California and Quebec, and British Columbia, which has a robust carbon tax. The U.S. has no federal carbon pricing, resulting in a fragmented approach compared to Canada’s nationwide system.
• Asia: As shown on the map below, China’s recently launched national ETS covers its power sector, marking a significant step given the country's role as the largest global emitter. However, the price per ton of CO₂e remains relatively low compared to Western counterparts, highlighting a potential area for policy tightening.
• Latin America and Africa: The maps depict scarce coverage with only a few countries like Mexico and South Africa implementing carbon taxes.

 

Figure 2: Carbon prices in USD$ per tCO2e (on 1 April 2024) for ETS and carbon taxes on country level[2]

Key steps for future success of global carbon pricing

To align with the Paris Agreement, global carbon prices need to be within the range of $230-390 per ton of CO₂e by 2030. At present, none of the regions above reach these levels, highlighting the need for higher carbon prices. Another challenge is the fragmented landscape of national, city, and state-level carbon pricing, which needs global alignment. Without this, EU exporters will continue to face competitive disadvantages against non-EU producers who do not face similar carbon prices. To ensure fair competition between EU producers and imported goods, the EU has implemented the Carbon Border Adjustment Mechanism (CBAM). This measure will apply a carbon price (operational in 2026) to emissions-intensive goods entering the EU, encouraging trading partners to establish their own carbon pricing systems.

For stakeholders looking to navigate this complex landscape, staying informed and engaged is crucial. We invite you to connect with our team for insights and strategic guidance on leveraging carbon pricing for sustainable business growth.

 

 

[1] https://carbonpricingdashboard.worldbank.org/compliance/price

[2] https://carbonpricingdashboard.worldbank.org/compliance/price