Syllabus:

GS3: Conservation, Environmental Pollution and Degradation, Environmental Impact Assessment.

Context: 

Recently, the World Bank released a report titled State and Trends of Carbon Pricing 2025.

More on the News

• Countries are increasingly adopting carbon pricing, which now represents almost two-thirds of global Gross Domestic Product.

• The number of operational carbon pricing instruments has grown significantly, from 5 in 2005 to 80 today, with India, Brazil, and Turkiye actively developing them.

• The report covers three types of carbon pricing instruments: Emissions trading system (ETS), carbon taxes and carbon credit trading mechanisms.

Key Findings of the Report

• 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 percent 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. 

• Market-based tools like Emissions Trading Systems (ETS) and crediting mechanisms allow companies to meet emission targets by trading allowances or carbon credits earned through reducing or removing emissions thus promoting cost-effective climate action.

• Nature-based carbon removal credits issued by independent crediting mechanisms rose by nearly 25 percent, driven by increased supply and buyer interest.

• In 2024, around 8 million tons of engineered carbon removals were purchased, but only 318,000 tons were actually delivered.

• Carbon pricing covers the power sector the most, followed by industry, mining, buildings, transport, and aviation. However, the waste and agriculture sectors are mostly not included.

• According to the report, carbon credit markets can help bring in private funding for projects that lower or remove emissions from the atmosphere.

• Among these projects, nature-based carbon removal projects received the largest share of the estimated $14 billion raised between January and September 2024.

• Additionally, carbon credit retirements increased, mainly due to the compliance market, which made up nearly a quarter of total demand in 2023. In contrast, demand from the voluntary carbon market slightly declined.

• Nearly 1 billion tons of carbon credits from independent mechanisms like Verra and Gold Standard were left unused by companies to offset their emissions globally.

• However, the report notes a growing interest from voluntary buyers in nature-based removal and clean cooking projects, which focus on cutting or removing emissions.

About Carbon Pricing

• 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).

State and Trends of Carbon Pricing 2025

• The World Bank’s annual State and Trends of Carbon Pricing report is aimed at providing an up-to-date overview of existing and emerging carbon pricing instruments around the world, including international, national, and subnational initiatives.

• The report covers three types of carbon pricing instruments: Emissions trading system (ETS), carbon taxes, and carbon credit trading mechanisms.

• An Emissions Trading System (ETS) is a market-based approach where governments set a cap on the total or intensity of greenhouse gas (GHG) emissions from regulated entities. 

• Companies can buy or sell emission allowances depending on their performance—those that reduce emissions below their limits can trade the surplus with others who exceed theirs.

• 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 enables the trading of carbon credits, each equal to 1 tonne of CO₂, earned through emission reduction or removal activities like afforestation or methane capture. Companies buy these to offset their own emissions.