Many economists and decision-makers argue that a key to reducing the greenhouse gas (GHG) emissions that drive climate change is to “put a price on carbon.” What exactly does this mean? Carbon pricing is an instrument that captures the external costs of GHG emissions—the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise—and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.1 The basic idea is to create a clear economic incentive to reduce emissions by those who are responsible for them.
There are two basic approaches to carbon pricing. An emissions trading system (ETS), also known as “cap and trade” or “allowance trading,” has two primary elements: setting a cap on GHG levels and distributing tradable allowances corresponding to this cap, authorizing emission sources to release a specified quantity (e.g., one ton) of carbon dioxide equivalent (CO2e). By establishing a limit, emission objectives are achieved, while the tradable allowances afford flexibility for individual emission sources to devise their own compliance strategies.2
A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions or—more commonly—on the carbon content of fossil fuels, i.e. a price per tCO2e. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.1
The World Bank Carbon Pricing Dashboard identified 73 carbon pricing initiatives in 2023 that covered 23% of global GHG emissions.3 A national example is the South Africa carbon tax that came into effect on June 1, 2019. The carbon tax places a price on CO2 emissions from large businesses in the industry, power, and transport sectors. A regional example is the European Union Emissions Trading System (EU ETS), a cap-and-trade type ETS that was introduced in 2005. It is the oldest and largest ETS operating worldwide.
The lowest charge was the US$ 0.079 / tCO2e carbon tax in Poland, while the highest was the US$156 / tCO2e carbon tax in Uruguay. The carbon tax in five jurisdictions covers a least 75 percent of their GHG emissions: Lichtenstein, Singapore, the Northwest Territories in Canada, and Japan. The ETS in the European Union covers 38% of its emissions, while the Regional Greenhouse Gas Initiative of 11 states in the United States covers 14% of emissions in its jurisdiction.
This visualization compares some of the important features of the world’s carbon pricing initiatives in 2023 across national, regional, and subnational jurisdictions.
1 The World Bank, “What is Carbon Pricing?” accessed March 3, 2024, https://carbonpricingdashboard.worldbank.org/what-carbon-pricing
2 U.S. Environmental Protection Agency, “What Is Emissions Trading?” accessed March 3, 2024, https://www.epa.gov/emissions-trading-resources/what-emissions-trading
3 The World Bank, “Carbon Pricing Dashboard, March 31 2023, https://carbonpricingdashboard.worldbank.org/
