The urgency regarding climate policies is growing as global temperatures continue to increase, bringing carbon pricing to the forefront of climate discussions.
Because of the race to achieve net zero emissions, it is crucial to comprehend how carbon pricing operates, its advantages, and the major trends influencing its future.
What is carbon pricing?
In its most basic form, carbon pricing is an instrument of climate policy that governments employ to control carbon emissions and form carbon markets. But it is also a pricing tool for voluntary carbon reductions accessible in the private sector.
There is no set price that emitters must pay for each ton of CO2 they release into the atmosphere; instead, it varies based on different factors and the particular method each emitter uses.
The main carbon pricing mechanism is the Emissions Trading Scheme (ETS), also known as Cap And Trade. Other mechanisms include internal carbon pricing, Results-Based Climate Finance (RBCF) and carbon offsets.
A carbon tax is a set amount that emitters must pay for their carbon emissions and typically increases over time. It works like a tax on sin in that increasing the amount of tax on carbon discourages emitters from polluting more.
On the other hand, by giving emission allowances, the government permits an entity to emit a specific amount of carbon. Each carbon subsidy, also known as a carbon credit or carbon certificate, grants the holder the right to emit one ton of CO2.
The total emissions of a company or an industry are also constrained by limiting the amount of allowances. These carbon credits can be traded between regulated companies, creating a market price for their carbon emissions.
The map below depicts the current distribution of carbon pricing across the globe, including carbon taxes and ETS.
Why put a price on carbon?
Many climate policy experts believe that carbon pricing is an effective approach for reducing harmful emissions since it can do so at the lowest possible cost.
It is also flexible and allows the market to decide how to reduce emissions in accordance with the capacity of the emitting facility. It’s the same as penalizing the offender but providing them the option of paying for their wrongdoing in a way they can afford.
Furthermore, carbon pricing encourages all types of emissions reductions that are equal to or less expensive than the carbon price. However, it discourages more costly mitigation measures.
Carbon pricing allows low-cost carbon mitigation by requiring emitters to pay the same price for their emissions. This approach, in reality, enables the most cost-effective way to reduce overall emissions.
Finally, carbon pricing increases government revenue while benefiting its citizens. Government officials can either rebate it to consumers or utilize it to fund green investments.
According to the World Bank’s 2023 Carbon Pricing report, carbon tax and ETS revenues increased by more than 10% in 2022. Globally, the amount reached about 95 billion USD.
In general, the goal of carbon pricing is to force polluters to emit less CO2 and other planet-warming emissions.Let’s now discuss the most recent worldwide trends in this field, with a focus on carbon credit prices and markets.
Anyone who wishes to join the worldwide fight against climate change must first understand the trends.
Global trends in carbon prices and market
To speed up climate action and reach the Paris goals, the carbon price must continue to climb, both in terms of price and coverage. That is what the entire industry aims for, but what are the global trends that are currently ruling the market?
Let’s take a look at the top three things that any carbon market speculator should know.
Slow but resilient growth
After experiencing rapid increase from 2020, the price of carbon credits (ETS) started to slow down in 2022. However, it has shown resilience amid various challenges occurring at the macroeconomic level.
Carbon prices increased as a result of last year’s worldwide energy crisis. In reality, half of the pricing tools saw price hikes, while the other third stayed unchanged.
As previously stated, the EU ETS experienced the greatest price increase, with carbon prices increasing by 100 Euros in February of this year. However, this trend is not consistent when carbon prices in other ETS fall, as they did in the Korean ETS.
Demand is mainly vonluntary
Despite the recent decline, voluntary demand for carbon credits from corporations remains the key driver of market growth. Compliance requirements play a minor role.
The total number of retirement accounts tracked by Ecosystem Marketplace declined by more than 1% in 2022, to 196 million. The majority of these retirement credits were for voluntary causes.
The number of credits issued from international carbon pricing mechanisms (e.g. Clean Development Mechanism) increased in 2022, accounting for 30% of total credits issued.
The continued dominance of voluntary demand implies that corporate commitments continue to increase. A poll of more than 500 medium and large firms in Europe and the United States indicated that over 90% believe carbon credits are important for offsetting emissions that cannot be reduced.
Similar patterns are being observed across countries, as an increasing number of governments consider establishing their own carbon credit schemes. These mechanisms are often accompanied by carbon tax or ETS policies.
CDT credit is at a high level
The price of carbon credits varies significantly, depending on relevant factors such as project type, credit issuer, credit type, co-benefits, etc. Real carbon prices reflect project costs and buyer preferences.
Data on carbon trading of the Xpansiv CBL 2022 indicates that the newer vintage version commands a greater price.
Despite being promoted as the preferred solution for reducing carbon emissions, the prime time of credits based on nature seems to be over. According to the chart, their prices have dropped the most, from over $15/ton to under $5/ton.
The price gap between types of credit has narrowed, with trade-in credits from carbon removal credits being traded at a higher price.
CDR credits appear to be flooding the market. In fact, just in the first half of 2023, purchases for carbon removal increased by an astounding 437%. Forecasts indicate that this number will rise even further as CDR projects receive both federal financing and private investment.
What’s awaiting in terms of carbon prices
The variety and complexity of the carbon market keep expanding.
New service providers, advanced technology platforms and markets, innovative products and new investors will drive further growth. This means increased standardization and regulation for carbon pricing.
According to a World Bank report, there are currently 73 carbon pricing instruments, covering approximately 23% of global greenhouse gas emissions.
The price of carbon is now substantially lower than what is required to meet the Paris Climate Agreement’s objectives. Hence, Ursula von der Leyen, president of the EU Commission, urged G20 leaders to take part in global carbon pricing. Leyen has been strongly advocating for the introduction of global carbon pricing to speed up the move to a net zero economy.
With development trends, rising volunteer demand, and requests for wider implementation, it is becoming more and more obvious that carbon pricing is necessary to accelerate efforts toward a sustainable and emissions-free future.