News

Global Carbon Pricing Snapshot

Published: November 1, 2023 by Editorial Team

For the last decade, the World Bank has published an annual report on the State and Trends of Carbon Pricing. During that time the scope of global emissions covered by direct carbon pricing instruments has increased from 7% to 23% representing a building momentum of greenhouse gas accounting and carbon price signals [1]. Direct carbon pricing instruments include those which Scorcher readers are likely familiar; emissions trading schemes (ETS), carbon taxes, and carbon credits. The most common ETSs are cap-and-trade programs that set a regulated emissions limit for covered entities. Carbon credits are a tradeable credit representing project-specific emissions reductions/removals that can be retired as an offset. When considering global progress on carbon pricing, it is important to recognize that the overall effectiveness of direct carbon pricing is influenced by changes to indirect carbon pricing. Indirect carbon pricing refers to policies that effect the price of products and fuels (ex: fossil fuel subsidies) associated with GHG emissions. Put simply, subsidies that lower the cost of using fossil fuels can negate efforts to develop a price for carbon emissions resulting from their consumption.

In response to macro-economic trends tied to the energy crisis in Europe and widespread inflation, fossil fuel subsidies hit an all-time high in 2022 [2]. Challenging economic and political conditions over the last few years caused some governments to implement stopgap measures aimed at reducing consumer energy prices, in some cases pausing ETS and carbon tax systems. Even so, direct carbon pricing remained relatively stable throughout 2022-23, a majority of which saw prices increase or remain unchanged, as several ETS’s decreased free allowances and tightened caps to stay consistent with national targets. In March of 2023 the European Union ETS, the largest carbon market by volume, saw prices exceeded $100 USD/ton CO2e for the first time ever. These trends reveal that rising fossil fuel prices are pressuring countries to adopt alternative energy sources, while regulated markets simultaneously ratchet down the cap on emissions and allowances. Market based solutions are therefore proving to be a useful tool for reducing carbon emissions and transitioning economies to cleaner energy systems.

Recent data suggests that annual global fossil fuel excise taxes and subsidies have reached a cumulative value of $1 trillion, while direct carbon pricing mechanisms annually generate just over $100 billion. The voluntary carbon market’s total annual value currently hovers around $2 billion. Speculators project that voluntary carbon markets could experience five-fold growth, rocketing up to $60 billion annually by 2030 [3]. The increasingly important role that carbon credits now play in direct carbon pricing is particularly noteworthy, spurred by rising net zero commitments and climate-positive corporate investments. When compared to the landmark year of growth in 2021, there was a slight decrease in the volume of credits issued and retired in 2022, as project developers and end buyers navigated new requirements and sophistication brought by investors, platforms, and coalitions into the marketplace. A recent Scorcher described the most prominent of these efforts to standardize the quality of credits led by the Integrity Council for Voluntary Carbon Markets. Frameworks like this are anticipated to align voluntary carbon markets with the tenants of regulated markets, pointing to the possibility of future integration with ETSs [4]. While substantial efforts are being made to scale direct carbon pricing, the above comparisons indicate the tremendous growth still needed to achieve goals for global emissions reductions.

The international distribution of direct carbon pricing has also expanded in recent years. Europe and North America have historically had the strongest presence, but today’s involvement spans Asia, Africa, Central and South America where numerous carbon pricing instruments have already been implemented or are anticipated. As of April 2023, there are 73 active carbon taxes and ETSs operating across six continents, not accounting for the swell in voluntary carbon market activity. The World Bank Carbon Pricing Dashboard includes an interactive map where readers can see the location and start date of these initiatives worldwide [5]. The Climate Trust is encouraged by the steady growth of global carbon markets and expects the overall effectiveness of carbon pricing initiatives to continuously improve.

References: