State and Trends of Carbon Pricing 2025
Kartavya Desk Staff
Syllabus: Environment
Source: WB
Context: The World Bank released its State and Trends of Carbon Pricing 2025 at a time when carbon pricing mechanisms are covering nearly 28% of global GHG emissions and generating over $100 billion in revenue.
About State and Trends of Carbon Pricing 2025:
• What is Carbon Pricing? Carbon pricing is an economic tool that attaches a cost to the emission of greenhouse gases, incentivizing emission reductions while internalizing climate-related externalities (e.g., floods, health costs).
• Carbon pricing is an economic tool that attaches a cost to the emission of greenhouse gases, incentivizing emission reductions while internalizing climate-related externalities (e.g., floods, health costs).
• Types of Carbon Pricing Mechanisms: Carbon Tax: A fixed price per tonne of CO₂ emissions (e.g., ₹ per tonne of fossil fuel carbon content). Emissions Trading System (ETS): A cap-and-trade model where emitters buy/sell emission permits under a pre-set limit. Carbon Credit/Crediting Mechanism: Tradeable credits are issued for verifiable emission reduction/removal (e.g., afforestation or methane capture).
• Carbon Tax: A fixed price per tonne of CO₂ emissions (e.g., ₹ per tonne of fossil fuel carbon content).
• Emissions Trading System (ETS): A cap-and-trade model where emitters buy/sell emission permits under a pre-set limit.
• Carbon Credit/Crediting Mechanism: Tradeable credits are issued for verifiable emission reduction/removal (e.g., afforestation or methane capture).
• Importance of Carbon Pricing: Environmental: Reduces GHG emissions by creating economic disincentives. Economic: Raises public revenue (over $100 billion globally in 2024). Social: Funds adaptation, green jobs, and energy transition in vulnerable sectors.
• Environmental: Reduces GHG emissions by creating economic disincentives.
• Economic: Raises public revenue (over $100 billion globally in 2024).
• Social: Funds adaptation, green jobs, and energy transition in vulnerable sectors.
Trends in Carbon Pricing in 2025:
• Expansion of Instruments: The number of carbon pricing tools has increased from 5 in 2005 to 80 in 2025, comprising 43 carbon taxes and 37 ETSs.
• Coverage Growth: Carbon pricing now covers ~28% of global GHG emissions, up from earlier years.
• Regional Adoption Rising: India, Brazil, and Türkiye are developing domestic carbon pricing frameworks.
• India’s ETS Framework: India’s upcoming ETS (2024) uses benchmark-based intensity limits rather than a hard emission cap.
• Revenue Mobilization: Globally, carbon pricing generated $100+ billion in public revenues.
• Sectoral Application Hierarchy: Power sector has the highest coverage, followed by industry and aviation, with agriculture and waste largely uncovered.
• Nature-Based Credit Dominance: In Q1–Q3 2024, $14 billion was raised mainly through afforestation and land restoration projects.
• Growth in Engineered Removals: Technologies like Direct Air Capture and Enhanced Rock Weathering are gaining interest.
• Delivery Lag in Engineered Removals: Out of 8 million tons committed, only 318,000 tons of engineered removals were delivered.
Challenges in Carbon Pricing Mechanism:
• Uneven Sectoral Inclusion: Sectors like agriculture and waste are mostly excluded from pricing frameworks.
• Volatility in Voluntary Markets: Voluntary carbon credit markets showed demand fluctuations in 2023, despite climate urgency.
• Delivery Deficit in Removal Projects: There’s a major gap between commitments and actual carbon removals delivered.
E.g. Technologies like DAC are still in early stages and require scaling.
• Data and Monitoring Weaknesses: Developing nations lack strong MRV systems (Monitoring, Reporting, Verification).
• Equity and Social Burden: Carbon costs may indirectly affect poor households through higher fuel or utility prices.
Recommendations:
• Broaden Sector Coverage: Bring agriculture and waste into the pricing framework using context-specific methods.
• Strengthen Monitoring Systems: Use blockchain or satellite verification to improve transparency and credit reliability.
• Stabilize Voluntary Markets: Standardize rules across crediting bodies like Verra and Gold Standard.
• Scale Direct Removals: Public-private partnerships needed for tech-based removals like Direct Air Capture.
• Leverage Revenue for Justice: Reinvest carbon pricing revenues into clean energy subsidies, health care, and vulnerable group protection.
Conclusion:
The 2025 carbon pricing report marks significant global progress but highlights glaring implementation and equity gaps. As climate threats intensify, robust pricing backed by transparent governance and inclusive policies will be key to a just transition.
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