Carbon pricing

Carbon pricing assigns a monetary value to greenhouse-gas emissions or to the carbon content of fuels. Its economic rationale is to make at least part of the climate-related cost of emissions visible to decision-makers, rather than leaving those costs entirely outside market prices. A price signal can encourage firms and households to reduce emissions where doing so is less costly than continuing to emit, and it can affect choices about energy, production and investment. Policies differ in the gases and sectors they cover, the way emissions are measured, and the level or structure of the price.

A carbon tax sets a public charge for each unit of covered emissions or carbon content; it fixes the charge while the resulting emissions depend in part on how emitters respond. An emissions trading system (ETS) requires covered entities to account for emissions using permits or allowances that can be traded. In a cap-and-trade ETS, the regulator sets an overall emissions limit and the market determines the allowance price. Other ETS designs use intensity benchmarks and do not necessarily impose a fixed limit on total emissions, so the details of a scheme matter. Carbon-crediting programs are related but distinct: they issue credits for qualifying emission reductions or removals, sometimes for use within another policy. Their environmental value depends on careful rules for measurement, additionality and permanence.

A carbon price changes the relative costs of higher- and lower-emission choices, but it does not produce identical outcomes everywhere. Effects depend on the policy's rate or emissions limit, coverage, exemptions, permit allocation and the alternatives available to firms and consumers. Because energy and goods prices, employment and household income can all be affected, the costs may be distributed unevenly. Governments may return revenues through household transfers, reduce other taxes, or fund public investment; these choices influence both the policy's economic effects and its distributional consequences. Research reviews multiple channels through which carbon-pricing reforms can affect poverty and inequality, and stresses the importance of policy design and local circumstances.

Carbon pricing is implemented through separate national and subnational policies rather than one universal global carbon tax or market. The European Union Emissions Trading System, launched in 2005, is a prominent cap-and-trade example: covered operators surrender allowances for emissions, and the system's cap is reduced over time. The World Bank's 2026 State and Trends report says direct carbon pricing covered nearly 30% of global greenhouse-gas emissions through 87 implemented policies, and that carbon pricing raised more than US$107 billion for public budgets in 2025. Those figures describe a diverse set of instruments and do not mean that all emissions face the same price or are covered by a single scheme.