Carbon Pricing
75 carbon pricing instruments are in operation worldwide, covering ~24% of global greenhouse gas emissions. The EU ETS sets the world's most ambitious price (~€70-90/tonne); California, the UK, China and Quebec operate major schemes. The bulk of global emissions remain unpriced. The IMF estimates an average global carbon price of just $5/tCO₂ — well below the $50-100 most climate models say is needed.
Key insights
EU ETS is the world's largest carbon market
The EU Emissions Trading System covers ~1.5 billion tonnes of CO₂ — power, heavy industry, intra-EU aviation, soon maritime. Started in 2005, has cycled through three phases. Phase 4 (2021-30) has tightened the cap and removed many free allowances. The Carbon Border Adjustment Mechanism (CBAM, fully effective 2026) extends EU carbon costs to imported steel, cement, aluminium, fertilizer and hydrogen — preventing 'carbon leakage' to unpriced jurisdictions.
China's national ETS is largest by volume but light on price
China's national ETS launched in 2021, covers the power sector (~4 billion tonnes CO₂ — larger than the EU's), and is intended to extend to industry. Allowances are based on intensity (emissions per unit output) rather than absolute cap — so emissions can grow if output grows. Prices have stayed in the $7-15 range — too low to drive substantial fuel switching but enough to start data infrastructure for tighter future policy.
Carbon taxes vs ETS — pros and cons
Carbon taxes set the price; markets find the quantity. ETS sets the quantity; markets find the price. Sweden, Switzerland, Canada and several Latin American countries use carbon taxes. Most carbon-priced emissions globally are under ETS systems. The choice is mostly political: taxes are simpler but politically harder to legislate; ETS systems can grandfather allowances to incumbents, making them easier to pass.
Carbon prices — major systems (2024)
USD per tonne CO₂, year-average
Key Finding: Uruguay and Sweden have the world's highest carbon taxes; the EU ETS leads ETS systems; many systems remain below $20/t.
Carbon pricing coverage by region
% of regional emissions covered by carbon pricing
Key Finding: EU has the highest coverage. China's coverage rises sharply once non-power sectors join the ETS. Sub-Saharan Africa and South Asia largely unpriced.
Methodology & caveats
Carbon price floors
Some ETS systems (UK, parts of Canada) operate with price floors — administrative prices that kick in if market prices fall below thresholds. Floors stabilize investment expectations but require periodic political adjustment. The EU ETS doesn't have a formal floor but the Market Stability Reserve effectively tightens supply when prices drop too low.
Free allowances and carbon leakage
Sectors exposed to international competition (steel, cement, aluminium, chemicals) historically received free allowances to prevent production migration to unpriced jurisdictions. Free allowances reduce environmental effectiveness but maintain industrial competitiveness. The EU is phasing out free allowances in parallel with CBAM rollout — replacing leakage protection from free permits with leakage protection from border charges.
Social cost of carbon
The 'right' carbon price equals the social cost of carbon (SCC) — the present value of climate damages from one additional tonne of CO₂. EPA estimates SCC at ~$190/tCO₂ (2024). Most current prices sit well below this — implying ongoing under-pricing of climate damages. Aligning prices with SCC would require politically unprecedented policy action; the IMF's preferred 'floor price' approach (rich countries $75, middle income $50, lower income $25) is more realistic.