Global Carbon Pricing: Expanding the Road Ahead
- Anonymous
- 2 days ago
- 3 min read
The OECD has released its Effective Carbon Rates 2025 report, providing a comprehensive assessment of how carbon is priced across 79 countries through carbon taxes, emissions trading systems, and fuel excise taxes. The report shows that although carbon pricing frameworks are expanding and becoming more complex, less than half of global emissions are exposed to a meaningful price signal, while many sectors continue to be loosely regulated by weak constraints, including free allowances and flexible compliance rules.
From the growing role of emissions trading systems to the widening gap between nominal and effective carbon prices, the findings reveal a structural tension between climate ambition and political compromise. At the same time, the report suggests that carbon pricing may be entering a critical phase where stronger reform could still reshape its effectiveness.
Why This Matters
Carbon pricing is expanding as priced emissions grows: Across the 79 countries covered, the share of GHG emissions facing a carbon tax, an ETS, or a fuel excise tax increased from 33% in 2018 to 44% in 2023. See images below for comparison between 2018 to 2023.
Dominance of fuel excise taxes: Fuel excise taxes remain the most widely used pricing instrument, covering around 24% of emissions, compared to approximately 5% covered by carbon taxes and 22% by ETSs.
Stagnant carbon tax coverage versus expanding ETS reach: Between 2018 and 2023, carbon tax coverage remained largely unchanged at around 5%, while ETS coverage more than doubled from roughly 10% to 22%.
Sector-specific instrument allocation: When buildings and road transport sectors are priced, carbon taxes are the primary instrument, whereas ETSs dominate pricing in the electricity and industry sectors.
Transport-driven high carbon prices: The road transport sector faces the highest Effective Carbon Rates, largely driven by high fuel excise taxes on diesel and gasoline.
Carbon Pricing Mechanisms Are Evolving
Transition from cap-based to intensity-based systems: Many ETSs are moving away from strict cap-and-trade designs toward intensity-based systems. In 2018, only 2 out of 20 ETSs using intensity benchmarks, compared to 12 out of 34 in 2023, now covering around 70% of ETS-regulated emissions.
Dilution of effective price signals through free allowances: Widespread use of free allowances means that while marginal carbon prices may appear high, the average prices actually paid are very low, at around €1.26/tCO2e in the electricity sector and €5.2/mtCO2e in industry, significantly weakening real decarbonisation incentives.
Expansion of flexible compliance options: ETS frameworks increasingly allow offsets, banking and borrowing, as well as sectoral and geographic flexibility, reducing the immediate constraint imposed by carbon pricing.
Policy trade-offs shaping system design: Carbon pricing mechanisms are not driven solely by emissions reduction goals, but are also designed to accommodate revenue generation, affordability concerns, and competitiveness protection, resulting in softer enforcement and political compromise.
Carbon Pricing Direction
Broadening scope toward previously unpriced sectors: Countries are gradually extending carbon pricing to sectors historically excluded from regulation, including agriculture, international aviation, and maritime transport, driven by new policy initiatives and expanded ETS coverage frameworks.
Geographic expansion across emerging economies: Carbon pricing is increasingly being considered or developed in major emerging markets, including Brazil, India and Türkiye, alongside growing momentum in Latin America and Southeast Asia, with Japan preparing to transition its voluntary GX ETS into a mandatory system from 2026.
Diversification and adaptive policy design: National carbon pricing systems are evolving toward more heterogeneous and flexible models in order to balance emissions reduction goals with social stability, affordability, and economic competitiveness.
Action
Policymakers: Use effective carbon rates as a policy signal, not just a revenue tool, by aligning price levels with sector-specific decarbonisation pathways and long-term climate targets.
Investors: Treat carbon rates as forward indicators of transition risk and opportunity, integrating them into valuation models, scenario analysis, and capital allocation decisions.
Emitting companies: Use carbon rates as a strategic benchmark to guide investment in efficiency, fuel switching and low-carbon technologies rather than as a short-term compliance cost.
Financial institutions: Embed effective carbon rates into lending criteria and risk pricing.
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