Global Trends and Developments in Carbon Pricing

Carbon pricing is an approach that assigns a financial cost to emitting greenhouse gases (GHGs). It began in the early 1990s when Finland implemented the world’s first formal scheme. Since then, other countries have adopted similar mechanisms, but carbon pricing remains relatively uncommon globally. Today, only 24% of global GHG emissions are subject to some form of carbon pricing, either through emissions trading schemes (ETSs) or carbon taxes. These tools aim to incentivize organizations to cut emissions by making pollution costly and rewarding reductions.

“Global Trends and Developments in Carbon Pricing” delves into carbon pricing, which is a pivotal tool for governments, companies, and investors to mitigate climate change and achieve net-zero emissions by 2050. The paper’s authors, a team of researchers from the Monash Centre for Financial Studies in Melbourne, Australia, in collaboration with carbon-focused firms C2Zero and SparkChange, analyze global carbon-pricing mechanisms, revealing significant progress over time, with a marked increase in both the coverage of emissions and the sophistication of pricing instruments.

The journey toward widespread carbon pricing has been slow and inconsistent, according to the paper. Carbon prices vary dramatically across regions—from $153 per tonne in Uruguay to less than $0.10 per tonne in Poland—and many countries have no carbon pricing at all. In addition, the scope of emissions covered by each system differs, creating a fragmented global landscape. While there is some progress toward harmonization, the authors explain, achieving a universal carbon price faces challenges related to measurement, enforcement, political will, and economic disparities.

Carbon Pricing’s Role in Achieving Net-Zero Goals

Carbon pricing plays a pivotal role in the global push to achieve net-zero emissions by 2050. Experts, including the Carbon Pricing Leadership Coalition, emphasize that carbon pricing is a crucial policy tool to address climate change. Net zero means balancing the amount of GHGs emitted with the amount removed from the atmosphere. It is a concept rooted in reports by the UN Intergovernmental Panel on Climate Change. To align with this goal, businesses and investors are shifting their strategies to reduce emissions, invest in clean technologies, and advocate for stronger climate policies.

For companies, carbon pricing internalizes the environmental costs of pollution, motivating them to adopt greener practices. For investors, it aligns financial returns with sustainability goals, helping direct capital toward low-carbon technologies and industries. The transparency of carbon pricing enables better decision making, allowing companies and investors to assess the risks and opportunities of carbon-intensive activities.

The Role of Investors in the Net-Zero Transition

Investors play a critical role in achieving a low-carbon economy. They are integrating carbon pricing into their investment strategies through such actions as

• setting clear carbon reduction targets for their portfolios,
• divesting from high-carbon assets and investing in climate solutions,
• engaging with companies on their climate strategies, and
• using data to assess climate risks and opportunities in their portfolios.

By directing capital toward sustainable businesses, investors can influence corporate behavior, promote innovation, and support the growth of the green economy. This alignment of financial goals with climate objectives reflects the realization that climate change is both a financial risk and an opportunity for long-term value creation.

The Real Carbon Price Index: A New Tool for Measuring Carbon Pricing

To address the challenge in analyzing and comparing fragmented global pricing systems, the researchers developed the Real Carbon Price Index (RCPI), the first comprehensive index of global carbon prices. The RCPI provides a composite measure of carbon prices worldwide, allowing stakeholders to track trends and better understand the cost of carbon across various jurisdictions.

By aggregating data from various carbon-pricing schemes, the RCPI offers investors, researchers, and policymakers a valuable tool for assessing the financial risks and opportunities tied to carbon emissions. It helps bridge gaps in understanding and supports better capital allocation toward responsible, low-carbon investments.

Benefits of a Unified Carbon Price

This paper posits that a single global carbon price would simplify the carbon trading market, reduce administrative complexity, and increase transparency, as well as create a level playing field for businesses, eliminating competitive disadvantages, and discouraging carbon leakage. By providing consistent incentives, a unified price could drive significant investments in clean technologies and accelerate progress toward net-zero emissions.

The evolution of carbon pricing over the past three decades has been marked by increasing coverage of emissions and improvements in the design of pricing mechanisms. Most systems still have low price levels, however, limiting their effectiveness. For example, the European Union Emissions Trading System has successfully reduced emissions through higher prices and generated revenue for climate initiatives, whereas China’s national ETS, while promising due to its scale, faces such challenges as low prices, limited scope, and market liquidity issues. These examples highlight both the potential and the challenges of implementing effective carbon-pricing systems.

Looking Forward 

The global transition to a low-carbon economy will depend on stronger climate policies, technological advancements, and increased international cooperation. A more harmonized approach to carbon pricing is essential for reducing competitive imbalances, minimizing carbon leakage, and achieving consistent emission reductions. The RCPI and similar tools will play a key role in driving transparency, informing investment decisions, and supporting the development of a unified global carbon-pricing framework. While the path to net zero is complex, carbon pricing remains a vital instrument in this journey, helping pave the way for a more sustainable and resilient world.

Key Takeaways

• Carbon pricing—a critical climate tool: Carbon pricing, through such mechanisms as ETSs and carbon taxes, aims to financially incentivize organizations to reduce GHG emissions. 
• Fragmentation challenges: Carbon pricing mechanisms are fragmented, with significant variations in pricing, scope, and enforcement across regions. This inconsistency creates challenges, including competitive imbalances, regulatory complexity, and limited effectiveness in reducing emissions globally.
• Real Carbon Price Index: The newly developed RCPI is the world’s first comprehensive global index of carbon prices. It aggregates mandated carbon prices worldwide to provide a benchmark for tracking trends and analyzing the financial risks and opportunities of carbon-intensive activities. 
• Investors as catalysts for change: Investors play a crucial role in the net-zero transition by aligning portfolios with climate goals, divesting from high-carbon assets, and investing in sustainable technologies and companies. 
• Path toward a unified carbon price: A global, unified carbon price would enhance market efficiency, simplify compliance for businesses, and reduce carbon leakage. Such efforts as the IMF’s proposed international carbon price floor and the World Trade Organization’s climate policy framework represent steps toward harmonization, but achieving this goal requires overcoming economic and political challenges. 
• Outlook—stronger policies and cooperation: The global journey to net-zero emissions by 2050 will depend on stronger carbon-pricing policies, technological advancements, and international collaboration. 

The Paper’s Authors 

Bei Cui, Research Fellow, Monash Centre for Financial Studies, Monash University, Melbourne, Australia 

Nga Pham, CFA, Senior Research Fellow, Monash Centre for Financial Studies, Monash University, Melbourne, Australia

Ummul Ruthbah, Senior Research Fellow, Monash Centre for Financial Studies, Monash University, Melbourne, Australia

Trinh Le, Research Fellow, Monash Centre for Financial Studies, Monash University, Melbourne, Australia

Jan Ahrens, CEO, SparkChange, Bremen, Germany

Roger Cohen, Founder, C2Zero, Sydney