Countries are increasingly adopting carbon pricing, which now represents almost two-thirds of global Gross Domestic Product, according to a new World Bank report titled State and Trends of Carbon Pricing 2025.
The number of operational carbon pricing instruments has grown significantly, from 5 in 2005 to 80 today, with India, Brazil, and Türkiye actively developing them.
Carbon pricing instruments capture the external costs of greenhouse gas (GHG) emissions. These external costs—such as damage to crops, healthcare expenses from heat waves and droughts, and property loss from flooding and sea level rise—are typically borne by the public. Carbon pricing mechanisms tie these costs to their sources, usually through a price on emitted carbon dioxide (CO2).
The report covers three types of carbon pricing instruments: Emissions trading system (ETS), carbon taxes and carbon credit trading mechanisms.
An ETS involves governments setting a limit, or cap, on the amount or intensity of GHG emissions generated by emitters. Companies are allowed to trade emission units to meet their targets. If they implement internal measures to lower their emissions, they can sell these units to other emitters.
A carbon tax explicitly prices carbon by defining a tax rate on GHG emissions or the carbon content of fossil fuels. Governments can levy this fee on companies for their GHG emissions.
A crediting mechanism allows the trading of credits (each representing 1 tonne of carbon equivalent) generated through activities that reduce emissions (e.g., capturing methane from landfills) or remove them (e.g., sequestering carbon through afforestation). Companies can then purchase these credits to offset their own emissions.
Governments, according to the World Bank, view carbon pricing not only as a tool to reduce emissions, but also as a potential source of revenue for fiscally constrained governments.
The World Bank report identified 43 carbon taxes and 37 ETSs currently in operation, collectively generating over $100 billion. Carbon pricing instruments now cover approximately 28 per cent of global GHG emissions. The report noted that most new and planned instruments are ETSs. In 2024, the Indian government established regulations for its planned ETS, which will target emissions intensity reductions in India’s industrial sector. India’s ETS, however, will be rate-based, meaning emissions are not capped. Instead, emitters are allocated a performance benchmark that serves as a limit on their net emissions.
Among the different sectors, carbon pricing coverage was highest in the power sector, followed by industry, mining and extractives sector, buildings, land transport and aviation. However, waste and agriculture are largely not covered by carbon pricing.
Carbon credit markets, the report stated, can attract private finance to development projects that reduce or remove emissions from the atmosphere.
Of these projects, nature-based carbon removal projects received the highest share of the estimated $14 billion raised in Q1-Q3 of 2024.
Further, carbon credit markets saw an increase in retirements, primarily driven by the compliance market, which accounted for almost a quarter of all observed demand in 2023. Demand from the voluntary carbon market showed a slight drop.
Compliance markets include domestic (entities under ETSs and carbon taxes can be allowed to purchase carbon credits to meet a portion of their compliance obligations), international (CORSIA, introduced by the International Civil Aviation Organization, requires covered airlines to offset the growth in their carbon dioxide emissions beyond 2019 levels by purchasing carbon credits issued by approved crediting mechanisms) and national determined contributions (a country’s demand for or international carbon credits under Article 6 of the Paris Agreement to meet national climate targets).
The voluntary carbon market is operated by independent organisations like Verra’s Verified Carbon Standard (VCS) and Gold Standard, involving private entities purchasing carbon credits to offset their emissions.
The global pool of credits left unused by companies to offset emissions from independent crediting mechanisms like Verra and Gold Standard was close to 1 billion tons.
However, the report records an increase in demand from voluntary buyers towards nature-based removals (emission removal) and clean cooking (emission reduction) projects.
Nature-based carbon removal credits issued by independent crediting mechanisms rose by nearly 25 per cent, driven by increased supply and buyer interest.
There is also a demand for engineered carbon removal projects like direct air capture (extracting CO2 directly from the atmosphere) or enhanced rock weathering (spreading of rock dust on land to increase carbon dioxide removal.
The year 2024 saw new purchasing commitments for engineered carbon removals, with an estimated 8 million tons purchased but only 318,000 tons have been delivered to buyers. The report stated that “the majority of purchasing commitments are therefore intended to support projects delivering credits in future years”.
