Nearly one-quarter of global carbon emissions are covered by pricing instruments today, and that number is set to expand in the coming years. These policies, which include 39 carbon taxes and 36 emissions trading systems (ETS), require polluters to limit or pay for their climate pollution. The goal is to drive rapid decarbonization.
Some of the most well-known carbon pricing schemes include California’s cap-and-trade program, which regulates some 400 heavy emitters in the state, the European Union’s Emissions Trading System, which celebrates its 20th anniversary this month, and Singapore’s national carbon tax, currently set at $25 per ton.
Carbon pricing is rapidly evolving, with existing programs set to expand to cover additional emission sources, and several new mechanisms expected to launch in the next two years.
In the near term, carbon pricing growth will likely be modest—analysts expect just a five percentage point increase in global emissions coverage in the next few years. But, as the impacts of climate change continue to make themselves painfully clear, these policies have the potential to become an increasingly popular tool for curbing global emissions and funding climate adaptation initiatives. Companies will need to keep up.
Source: Carbon Pricing Dashboard, World Bank, here
Three carbon pricing trends to watch
Source: State and Trends of Carbon Pricing, 2024, The World Bank
Carbon pricing policies are changing at the national, subnational, and even sectoral level. Here are three areas to watch in 2025.
Prices continue to ratchet up
Most carbon pricing schemes include ratcheting mechanisms, gradually reducing allowable emissions, or increasing the price polluters have to pay per ton of climate pollution. These systems give companies a clear incentive to decarbonize to avoid rising costs.
Singapore’s carbon tax, for example, is set to increase by 80 percent next year, up to $45 per ton. The auction price of California’s carbon allowances increases by 5 percent each year, plus inflation.
The EU’s Carbon Border Adjustment Mechanism
The European Union’s Carbon Border Adjustment Mechanism (CBAM) puts a price on carbon embedded in goods imported into the European Union, equal to the price in the region’s existing emissions trading scheme. The adjustment mechanism will require payments beginning in 2026.
“That starts to have a whole different overlay across the market, across the globe, where companies who may not have considered themselves to be a part of the EU’s emissions are being seen in the Scope 3 and embedded emissions of what they are exporting,” said Stephen Donofrio, head of carbon markets intelligence at OPIS, a Dow Jones Company that provides energy and carbon market intelligence.
The policy will likely set off a domino effect, with other jurisdictions implementing similar policies in the near future. The United Kingdom plans to implement its own border adjustment system by 2027, with many other countries considering following suit.
Sector-specific carbon pricing: airlines and maritime shipping
Several industries are ramping up their own carbon pricing instruments. In aviation, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), limits emissions from international flights, a pollution source not covered by country-level climate targets under the Paris Agreement.
The program is in its first phase, during which countries still have the choice of whether to participate. Program analysts expect the first phase will generate demand for between 60 and 160 million eligible carbon credits.
Airlines based in the United States will have the highest demand for carbon credits to meet CORSIA’s first phase requirements, with forty-four U.S. airlines subject to the program. Airlines in the United Kingdom and Germany are likely to have the next highest demand, according to analysis from Abatable, a carbon market analysis firm.
The International Maritime Organization plans to launch a similar sector-specific carbon pricing initiative in 2027.
OPIS is releasing this month a new market analysis tool to help companies keep up with these and other global carbon pricing policies. The tool, Carbon & Clean-Fuels Analytics, Market Intelligence & Regulatory Outlooks, will provide weekly policy analysis and price forecasts.
Effects on climate change
A growing body of evidence suggests that carbon pricing works. A recent analysis across 21 existing carbon pricing schemes found that, on average, these policies slash emissions by 10 percent.
But most existing programs aren’t yet ambitious enough to meet the Paris Agreement targets. Fewer than 10 percent of current carbon pricing programs have prices high enough to limit temperature rise to well below 2℃, according to analysis from the UN High-Level Commission on Carbon Prices.
Though carbon pricing policies aren’t yet at the level we’ll need to safeguard a vibrant planet for the next generation, they remain one of the most proven tools we have to drive economy-wide decarbonization. Companies can expect to see more pricing mechanisms launch in the years to come.
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