Climate Governance Initiative

Carbon Pricing Navigator

A comprehensive tool designed to help organisations understand, implement, and navigate various carbon pricing strategies.

Every tonne of carbon is a cost to society because it causes climate change. However, this cost is invisible in commercial markets. Invisible that is, unless it is explicitly factored in, for example, by government regulation, or by companies choosing to reflect it in their balance sheets and decision making processes.

Over 100 national or subnational governments have now put a price on carbon, and this number is growing each year. As the cost of carbon increases and pricing mechanisms expand to cover more sectors, climate change has become a concrete financial risk, and opportunity, to countless businesses. Even more organisations are indirectly impacted through their supply chains, and efforts to price carbon on a global scale are ramping up.

Businesses are also starting to take the lead. Microsoft, for example, prices carbon internally at $15 per tonne, and at $100 per tonne for business travel. It has used the revenue generated to purchase renewable energy and sustainable aviation fuel, as well as carbon credits, to meet its aim of being a “carbon negative, water positive, zero waste company” by 2030.

More and more businesses are taking similar action, not just to reduce their greenhouse gas (GHG) emissions but to prepare for regulatory carbon pricing that is growing in scope, size and complexity. By understanding carbon pricing, boards can ensure that their businesses are resilient to policy developments in this area and positioned to implement effective internal carbon pricing policies, creating a competitive advantage over less-prepared peers.

According to Amir Sokolowski, global director for climate change at CDP: “While there are other strategies to do so, failure to use this [carbon pricing] tool could imply that companies may be failing to adequately plan for the medium- to long-term realities of the cost of carbon.”

 

Carbon Pricing Checklist for Board Directors

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Understanding carbon pricing

  • Understand the basic rationale for putting a price on carbon
  • Gain insight into the different types of policy and business instruments that may be used to price carbon.
  • Understand national and international carbon pricing trends including new mechanisms, and carbon price increases.

Business implications

  • Assess the likely business impacts of regulatory compliance carbon pricing, voluntary carbon pricing and internal carbon pricing
  • Understand how carbon pricing can help your company to decarbonise and make better business decisions
  • Consider how pricing mechanisms abroad or potential carbon border adjustments may influence value chains

Be prepared to discuss carbon pricing in the boardroom

  • Ensure that your board and business is ready for new and evolving carbon pricing policies building the implications into medium to long-term strategic planning and transition risk analysis
  • Check whether your business has set an internal or ‘shadow’ carbon price to manage climate-related transition risks and whether it is in line with recommendations as highlighted in the ‘Carbon pricing and the Board’ section of this briefing.
  • If an internal carbon price has not been set, encourage the board to explore this as part of its climate net zero strategy and consider what you would like this to achieve, what price-level and mechanism for internal carbon pricing is appropriate, and how you will report on it to stakeholders.

Carbon pricing by governments - what you need to know

This section provides an overview of how carbon pricing works as a concept, the policy measures under development, and the benefits and considerations for governments around the world.

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Carbon Pricing Around the World

The World Bank Carbon Pricing Dashboard provides a detailed overview of global carbon pricing initiatives. As of March 2024, the dashboard lists 73 carbon pricing initiatives in 39 national jurisdictions which will cover 23% of global GHG emissions. This is a significant increase from previous years – in 2010 only 5% of global emissions were covered by carbon pricing, rising to 15% in 2020. These initiatives cover a large portion of highly-developed countries and a growing number of middle-income economies. Though each country faces its own challenges with market implementation, this overall expansion trend is likely to continue.

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The London Stock Exchange Group has estimated that the total value of global compliance carbon markets reached $948 billion in 2023, with the EU ETS representing 87% of the global trade. Carbon prices within emissions trading systems (ETS), are dynamic and can be volatile, but the average price is increasing. In the areas covered by a carbon price, the average price is now about $20 per ton. It’s also worth noting that the markets have remained largely resilient to recent geo-political shocks. 8. ETS Pie Chart.png

However, if you add in the 75 percent of emissions that are not covered, then the global average carbon price is just $5 a ton. We need an average price of at least $85 a ton by 2030 to stay on track with the goal of the Paris Agreement, so there is still some way to go in terms of pricing carbon effectively. Higher carbon prices, new instruments and increased ETS auctioning resulted in a record USD 84 billion of global carbon pricing revenue in 2021, around 60% higher than in 2020.

Regions at a glance:

Although the growth of carbon pricing is a global trend, there are important differences between how it has been implemented in different jurisdictions. Carbon pricing is well-established in Europe, with the focus now being on expanding current mechanisms to cover a wider range of emissions. In the Asia-Pacific region, carbon pricing is a newer phenomenon – though prices tend to be low, and most jurisdictions have not implemented carbon pricing, there is potential for significant growth in this region. Africa has seen minimal carbon pricing implementation, but leaders have advocated for global carbon pricing measures to reduce emissions and address climate inequalities. By contrast, North America has some successful carbon pricing systems, but has faced greater issues with political feasibility than in Europe.

This section takes a brief look at these four regions, exploring key carbon pricing progress and issues.

We have advice and guidelines available for the following countries and regions:

Africa
Asia Pacific
Europe
North America