BlogCarbon Pricing, Emissions Trading System (ETS)

Carbon markets are on the rise worldwide 

Written by

Ulf Narloch

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Despite the economic challenges and rising energy prices, carbon pricing systems were further expanded in 2022. With carbon taxes, emissions trading and carbon-credit programs, there are currently about 100 such market-based systems worldwide to combat climate change.  

Carbon pricing unhalted  

The World Bank notes a steady evolution of carbon markets over the last 10 years. The recent state and trends report shows that systems for direct carbon pricing via carbon taxes, emissions trading or carbon credit schemes have been expanded in 2022. 

As a result of public pressure to curb energy price inflation, only a few countries backed away from their plans to introduce or strengthen carbon pricing. In Germany, for example, the planned increase in prices in the national emissions trading system (nEHS) for fuels has been postponed by one year.  

Previously, the International Carbon Action Partnership, a global forum on emissions trading, also recorded an unstopped dynamic with numerous innovations for new trading mechanism in 2022

In addition to instruments of direct carbon pricing, instruments of indirect pricing (e.g., excise duties and differentiated VAT rates for fuels) are also used in many countries.  

Expansion of direct carbon pricing  

The Carbon Pricing Dashboard developed by the World Bank, currently counts about 100 direct carbon pricing schemes around the world. Their design varies greatly by country and region. 

Carbon taxes 

In total, there are already 37 carbon tax systems that levy a charge on carbon emissions via a fixed price. These currently cover around 6% of global emissions. 

National carbon taxes vary in the coverage of emissions. Norway’s carbon tax applies to all energy-related direct emissions, and thus, cover over 60% of the country’s emissions.  

South Africa also imposes a carbon tax on fossil fuels. This means that about 80% of the country’s emissions are taxed. However, companies and households benefit from tax exemptions for 60-90% of their emissions. Uruguay’s carbon tax is applied solely to gasoline, thereby, only covering about 10% of emissions.  

The amount of carbon taxes also varies greatly. Uruguay has the highest tax of approximately EUR 140/tCO2. Sweden’s carbon tax is above EUR 100/tCO2. At the other end of the spectrum, carbon taxes in South Africa, Mexico, Chile and Argentina are well below EUR 10/tCO2. 

In addition to 27 national systems, there are 10 subnational jurisdictions with carbon taxes, mainly in Canadian provinces. 4 Mexican states have also recently introduced carbon taxes.  

Emissions trading 

In Emissions Trading Systems (ETS) the amount of emissions is capped. Based on different allocation mechanism, emission allowances are the allocated to companies, who can trade these allowances.  

The existing 36 ETS have a wide reach and cover about 18% of global emissions – mainly through the systems in the EU and China. 

The EU ETS is the oldest and most far-reaching system in the world.  Since 2005, it has covered emissions in energy, industry and aviation – and from 2024 it will include maritime transport as well. Further ETS-reforms will also create a separate system for fuels (ETS-II) from 2027. 

China’s ETS was launched in 2021, having previously been piloted in 8 zones. For the time being, it is limited to the electricity sector and thus covers almost 30% of national emissions. 

In 2022, Indonesia introduced its own ETS, which is used to price emissions from coal-fired power plants. 

Most ETSs cover the energy and industry sectors, however, New Zealand plans to go one step further and will extend its emissions trading to agriculture from 2025.  

In 2022, large price fluctuations were observed in most ETSs. In the EU and UK ETS, prices rose to EUR 100/tCO2 in some cases. In contrast, prices in the Chinese ETS remained well below EUR 10/tCO2. 

Of all the ETSs, the majority (23) are organized at sub-national level. Apart from the pilot programs in China, these can be found mainly in Canada and in some US states.  

Carbon credits 

Carbon credits are generated via compensation systems, which can be used to offset unavoidable emissions.   

The majority of credits are still through independent, non-governmental programs (e.g. Verra, Gold and Plan Vivo). From 2021 to 2022, the amount of credits issued fell by 20% – partly due to difficulties in generating new projects.  

In contrast, the number of credits generated in government credit programs grew. There are currently a total of 14 programs at national level and 15 at sub-national level. The largest government programs include the Emission Reduction Fund in Australia, the Compliance Offset Program in California, and the RGGI Carbon Offset Mechanism on the U.S. East Coast.  

As a supply-focused instrument, these are suitable if carbon credits generated via them can be credited to carbon tax and trading systems, as is currently the case in Colombia, Mexico and South Africa, among others. In India, it was decided to introduce a national carbon credit program together with emissions trading.  

While mandatory offsets are still in the making, demand in most offset programs comes from companies that voluntarily offset the credits towards their climate targets. 

Prices for carbon credits on voluntary carbon markets vary greatly. For forests and natural solutions, these are on average less than EUR 5/tCO2. For technological carbon removals prices reach several hundred Euros.  

While prices via trading platforms show a downward trend, large price increases have been recorded in direct (over-the-counter) trading transactions.  

Increasing relevance outside the EU 

Despite the expansion of carbon pricing, there is still a great catch-up potential in coverage and price levels.   

According to the World Bank calculations, less than 5% of global emissions are subject to a carbon price of USD 50 to 100/tCO2. Such a price level would be necessary by 2030 to meet the 2-degree target according to recommendations by the High-Level Comission of Carbon Prices.  

However, carbon pricing instruments are gaining importance not only from a climate policy perspective. In times of rising debt, these can also relieve the burden on state coffers together with the reduction of fuel subsidies. As a result, threshold countries are also increasingly looking at these instruments. 

In addition, interest from countries with close trade relations with the EU is increasing as a result of the decision to introduce an EU Carbon Border Adjustment Mechanism (CBAM). CBAM levies a carbon tax on imports in the EU if they are not already taxed in the country of origin.  

By setting their own carbon pricing, exporting nations can prevent carbon revenues from going to the EU. Turkey, for example, is introducing its own ETS in response to CBAM.  

For EU importers, an understanding of the non-European carbon pricing systems becomes important in order to be able to credit carbon prices paid abroad in the EU CBAM.  

Sources and further information: 

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