Carbon Pricing: Record Revenues Amidst Global Climate Challenges - Are We On Track?

In a year marked by record-high carbon pricing revenues, a new report by the World Bank highlights both progress and persistent gaps in the global fight against climate change. Covering 24% of global emissions, carbon pricing instruments have expanded but still fall short of the levels needed to meet Paris Agreement targets. Despite setbacks, middle-income countries are showing promising strides, and the integration of carbon credit markets is seen as a crucial next step. The report emphasizes the need for stronger political commitment and innovative approaches to ensure carbon pricing effectively curbs emissions.

In the relentless battle against climate change, one policy tool stands out for its potential to drive significant reductions in greenhouse gas emissions: carbon pricing. Over the past decade, carbon pricing has experienced robust growth, with instruments like carbon taxes and emissions trading systems (ETSs) now covering approximately 24% of global emissions. However, as highlighted in the World Bank's latest "State and Trends of Carbon Pricing 2024" report, there remains a substantial gap between countries' commitments and their implemented policies.

Insufficient Progress Despite Growth

Despite the widespread adoption of carbon pricing mechanisms, current prices remain insufficient to achieve the ambitious targets set by the Paris Agreement. The report reveals that while carbon tax rates have shown slight increases, price changes within ETSs have been mixed. Notably, ten systems, including long-standing ETSs in the European Union, New Zealand, and South Korea, experienced price decreases over the past year. These fluctuations underscore a critical issue: even with increased coverage, current price levels fall short of what is needed to limit global warming to well below 2°C.

Limited Adoption but Promising Signs

The global landscape of carbon pricing instruments has expanded to 75 carbon taxes and emissions trading schemes, reflecting a net gain of two new instruments over the past year. Middle-income countries such as Brazil, India, and Türkiye have made significant strides towards implementing carbon pricing, showcasing a promising trend for future adoption. Subnational initiatives also saw progress, with various regions introducing new carbon taxes and emissions trading systems.

Sector-specific multilateral initiatives have shown positive developments as well. For instance, international aviation and shipping sectors are beginning to incorporate carbon pricing mechanisms. Additionally, the European Union's Carbon Border Adjustment Mechanism (CBAM) has started requiring importers of specified products to report embedded emissions, signaling a significant shift in the global carbon pricing landscape.

Record-High Carbon Pricing Revenue

One of the most notable highlights from the report is the record-high carbon pricing revenue achieved in 2023, exceeding USD 100 billion for the first time. This milestone was driven primarily by high prices in the EU and a temporary shift in some German ETS revenues from 2022 to 2023. ETSs continue to account for the majority of carbon pricing revenues, with over half of the collected revenue being funneled into climate- and nature-related programs.

Despite these record revenues, their contribution to national budgets remains relatively low. This indicates a significant opportunity for governments to reform fiscal policies, integrating carbon pricing more effectively into broader economic frameworks.

Emerging Flexible Designs

Governments worldwide are increasingly adopting flexible designs for carbon pricing instruments. Multiple carbon pricing instruments are now being used in parallel to expand coverage or increase price levels. While carbon pricing has traditionally been applied in the power and industrial sectors, there is a growing consideration of its application in other areas, such as maritime transport and waste management.

Regulated entities are also allowed to use carbon credits to offset their carbon pricing liabilities. This flexibility can help lower compliance costs and extend the carbon price signal to uncovered sectors. Additionally, carbon pricing continues to offer benefits beyond emission mitigation, serving as a valuable fiscal tool that can support various economic and environmental objectives.

Carbon Credit Markets: Mixed Movements and Integrity Efforts

The carbon credit markets saw mixed movements in 2023. Credit issuances fell for the second consecutive year, and retirements remained significantly below issuances, creating a growing pool of non-retired credits. While compliance demand is building, voluntary demand continues to dominate the market. Prices declined across most project categories, with the exception of carbon removal projects, which have maintained sustained interest.

Efforts to enhance the integrity and credibility of carbon credits are ongoing. The Integrity Council for the Voluntary Carbon Market has set a standard for high-quality carbon credits, and the first batch of these approved credits is anticipated to be available in 2024. These initiatives aim to restore trust and confidence in carbon credit markets, ensuring that they effectively contribute to global climate goals.

Urgent Action Needed

The report underscores the urgency of aligning mitigation efforts with the Paris Agreement’s temperature goals. While carbon pricing instruments currently cover about a quarter of global emissions, achieving broader and more effective coverage is critical. Large middle-income countries, such as Brazil, India, and Türkiye, are making significant progress, which could boost future global coverage.

However, to truly unlock the potential of carbon pricing, higher pricing and wider coverage are essential. This requires strong political commitment, robust global frameworks, and initiatives to share best practices. Time is not on our side, and countries must move further and faster to decisively bend the emissions curve and safeguard a livable planet.

The World Bank continues to support comprehensive and effective carbon pricing and high-integrity carbon credit markets. By fostering international cooperation and providing up-to-date information on key developments, the World Bank aims to inform, influence, and incentivize stakeholders to support policies that put a price on carbon and help achieve global climate goals.

FAQs

Q1: What is carbon pricing?

Carbon pricing is an approach to reducing global warming emissions by charging emitters a fee for each ton of greenhouse gases they emit. The goal is to incentivize companies and individuals to reduce their carbon emissions by making it more costly to pollute.

Q2: What are the main types of carbon pricing instruments?

The two main types of carbon pricing instruments are carbon taxes and emissions trading systems (ETSs). Carbon taxes put a direct price on carbon emissions by setting a specific tax rate for each unit of greenhouse gases released. ETSs, also known as cap-and-trade systems, limit the total level of greenhouse gas emissions and allow industries with low emissions to sell their extra allowances to larger emitters.

Q3: Why is carbon pricing important for meeting climate goals?

Carbon pricing is essential because it provides a financial incentive for reducing greenhouse gas emissions. By making it more expensive to emit carbon, it encourages businesses and individuals to adopt cleaner technologies and practices, ultimately helping to limit global warming.

Q4: What progress has been made in carbon pricing globally?

As of 2024, there are 75 carbon pricing instruments in operation worldwide, covering around 24% of global emissions. Middle-income countries like Brazil, India, and Türkiye are making significant strides in implementing carbon pricing, which could increase global coverage in the future.

Q5: What are the challenges in achieving effective carbon pricing?

Despite the growth in carbon pricing instruments, many of these initiatives still fall short of the price levels needed to meet the Paris Agreement targets. Political commitment, stronger global frameworks, and broader coverage are essential to unlock the full potential of carbon pricing.

Q6: How are carbon pricing revenues used?

Carbon pricing revenues exceeded USD 100 billion in 2023, with over half of the collected revenue funding climate- and nature-related programs. However, their contribution to national budgets remains relatively low, indicating potential for greater integration into broader fiscal policies.