Global Carbon Pricing Trends 2025
Countries worldwide are increasingly adopting carbon pricing mechanisms to address greenhouse gas emissions. A recent report by the World Bank marks that carbon pricing now encompasses nearly two-thirds of the global Gross Domestic Product (GDP). The total number of operational carbon pricing instruments has surged from five in 2005 to 80 in 2025. Key players such as India, Brazil, and Türkiye are actively developing these instruments.
About Carbon Pricing Instruments
Carbon pricing aims to internalise the external costs of greenhouse gas emissions. These costs include damage to crops, healthcare expenses, and property loss from climate-related events. Carbon pricing methods typically involve a price on emitted carbon dioxide (CO2). The three main types of carbon pricing instruments are:
- Emissions Trading Systems (ETS): Governments set a cap on GHG emissions. Companies can trade emission units to meet their targets. If they reduce emissions, they can sell excess units.
- Carbon Taxes: A direct tax is levied on GHG emissions or the carbon content of fossil fuels. This encourages companies to lower their emissions to reduce tax liabilities.
- Carbon Credit Trading: Companies can trade credits that represent one tonne of carbon equivalent. These credits are generated through activities that either reduce emissions or sequester carbon.
Economic Impact of Carbon Pricing
Carbon pricing is not only a tool for emission reduction but also a potential revenue source for governments. The World Bank report indicates that 43 carbon taxes and 37 ETSs currently generate over $100 billion. These instruments cover approximately 28% of global GHG emissions, with the power sector being the most affected.
Sectoral Coverage of Carbon Pricing
The coverage of carbon pricing varies by sector. The power sector has the highest coverage, followed by industry, mining, buildings, land transport, and aviation. However, sectors like waste management and agriculture remain largely unregulated under current carbon pricing frameworks.
Growth of Carbon Credit Markets
Carbon credit markets are gaining traction, attracting private finance for projects aimed at reducing emissions. Nature-based carbon removal projects have seen investment, raising an estimated $14 billion in early 2024. The compliance market, which includes domestic and international obligations, is the primary driver of demand for carbon credits.
Trends in Voluntary Carbon Markets
Voluntary carbon markets, operated by independent organisations, allow private entities to purchase carbon credits. Recent trends indicate a growing interest in nature-based removals and clean cooking projects. Demand for engineered carbon removal solutions, such as direct air capture, is also on the rise, with new purchasing commitments emerging in 2024.
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