GLOBAL ADOPTION OF CARBON PRICING MECHANISMS

The World Bank’s 2025 State and Trends of Carbon Pricing Report highlights:

  • Carbon pricing instruments now cover nearly two-thirds of global GDP.
  • The number of operational carbon pricing instruments has increased from 5 in 2005 to 80 in 2025.
  • Emerging economies like India, Brazil, and Türkiye are actively developing or expanding carbon pricing tools.

What is Carbon Pricing?

  • Carbon pricing is a market-based tool aimed at internalising the external costs of greenhouse gas (GHG) emissions.
  • These external costs include:
    • Crop losses,
    • Healthcare burdens, and
    • Infrastructure damage from climate-related events.

Types of Carbon Pricing Instruments

  • Emissions Trading Systems (ETS):
    • Cap-and-trade model.
    • Example: EU ETS is the largest in the world.
    • Companies trade emission allowances to stay within emission caps.
    • Incentivises cost-effective emission reductions.
  • Carbon Taxes:
    • Direct tax on GHG emissions or fossil fuel carbon content.
    • Example: Sweden has one of the highest carbon taxes (~$137/tonne CO₂).
    • India has a Coal Cess (now part of GST compensation fund) — a form of implicit carbon tax.
  • Carbon Credit Trading:
    • Credits represent 1 tonne of CO₂ reduced/sequestered.
    • Companies can purchase credits to offset emissions.
    • India’s Carbon Credit Trading Scheme (CCTS) was notified in June 2023 and is being operationalised.

Economic Impact of Carbon Pricing

  • Revenue generation: Over $100 billion in 2024 from:
    • 43 carbon taxes
    • 37 ETSs
  • Covers ~28% of global GHG emissions.
  • Power sector remains the most extensively regulated.
    • Sectoral Coverage:
  • Highest coverage:
    • Power
    • Industry
    • Mining
    • Buildings
  • Moderate coverage:
    • Land transport
    • Aviation
  • Under-regulated or excluded:
    • Waste management
    • Agriculture

Carbon Credit Markets: Rising Momentum

  • Carbon credit markets are becoming a key channel to attract private climate finance.
  • Investment in nature-based carbon removal projects has crossed $14 billion in 2024.
  • India aims to mobilize credits from afforestation, bioenergy, and energy efficiency under its new CCTS framework.

Voluntary Carbon Markets (VCMs): Emerging Trends

  • Operated by non-state actors and NGOs.
  • Allow private companies to voluntarily purchase credits to meet ESG targets.
  • Trends in 2024:
    • Increased demand for nature-based solutions (e.g., mangrove restoration).
    • Growth in clean cooking projects in Africa and Asia.
    • Surge in interest in engineered carbon removal technologies:
      • e.g., Direct Air Capture (DAC).
      • New corporate purchasing commitments, especially in the US and EU.

India’s Role and Developments

  • India’s Carbon Credit Trading Scheme (CCTS) aims to:
    • Create a domestic carbon market under the Energy Conservation Act (Amended), 2022.
    • Complement existing Perform, Achieve, and Trade (PAT) and Renewable Energy Certificate (REC)
    • Target both compliance and voluntary buyers in sectors like steel, cement, power.

With 80 instruments in operation, carbon pricing is evolving into a mainstream policy tool for emission reduction and sustainable development financing. For India, effective implementation of carbon markets will be key to achieving net-zero targets by 2070, enhancing energy efficiency, and unlocking green investments.

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