Carbon Pricing Trends – where are we at?

Despite higher energy prices and global inflation pressures, emissions trading systems (ETSs) and carbon taxes appear to have weathered the political and economic challenges that emerged last year, and have continued to expand. That’s according to an assessment of global carbon pricing trends released by the World Bank.

In April this year, there were 73 carbon taxes or ETSs in operation (see map below) with the World Bank now listing Australia amongst jurisdictions moving to an ETS. This stems from the passage of legislation to introduce crediting for the existing Safeguard Mechanism from 1 July 2023, which also included a tightening of baselines for the sectors covered - “effectively transitioning into a rate-based ETS”.  The credits were introduced as an incentive to facilities to go beyond their baselines. Under its reformed shape the safeguard mechanism has become a baseline and credit scheme, that puts a price signal on about 28 per cent of Australia’s greenhouse gas emissions from 215 safeguard facilities, across the mining, manufacturing, transport, oil, gas and waste sectors.

Outside Australia new ETSs started in Austria and Washington State in the US last year, while Indonesia announced plans for a mandatory national ETS.  At the same time, Germany’s national ETS was extended to cover coal-derived fuels used in facilities that are not captured by the European Union’s (EU) ETS. But, as the map shows there remain significant parts of the world not involved in carbon pricing, while those countries with an ETS vary in scope and integrity.

The mechanisms now cover around 23 per cent of international carbon emissions and last year raised a record US$95 billion ($140 billion) in revenue.

Figure 1: ETSs and Carbon Taxes by Jurisdiction (click here to view a larger version)

Source: World Bank

Carbon Pricing

In terms of carbon prices resulting from various schemes, last year Singapore locked in the higher prices it had previously announced in 2021. This means the island nation’s carbon tax increases from SGD5 to SGD45 (AUD5.50 to around AUD50) starting in 2026. Elsewhere, Canada proceeded to tighten its federal carbon pricing benchmark with the minimum price increasing by CAD15 per tonne a year from this year through to 2030. The price is set to be more than CAD170 ($188) by 2030. The EU’s ETS saw the biggest price increase during the reporting period with its ETS reaching more than EUR100 ($159) in March 2023.  Extremely high gas prices and limited supplies in 2022 made coal more competitive while drought in Europe created issues with some plants, such as France’s nuclear generators. In many European countries these factors led to a temporary pause in the trend of decreasing use of coal, with higher energy sector emissions helping push up the EU’s carbon price. 

Despite this, the World Bank’s data suggestsmany ETSs reported price drops with the largest in South Korea (down 35 per cent) and a marked decline in New Zealand (see figure 2, which shows the changes in ETS carbon prices in selected jurisdictions over the past five years). According to S&P Global Commodity Insights prices of New Zealand Units (NZUs), the country's emission trading carbon allowance unit, dropped to 18-month lows in March this year.  The NZU carbon price is down by about 30 per cent from a peak of NZ$88.50/mt reported in November 2022. This appears to have been driven by NZ’s Climate Change Commission which recommended a price increase. In December 2022 the NZ Government approved a much lower price setting for the ETS, which, according to S&P triggered the fall in NZU prices at the end of last year.

Figure 2: ETS Price Trends in Selected Jurisdictions 2018-2023

Note: Based on data from ICAP Allowance Price Explorer. Prices for the RGGI initiative and for California and Québec CaT, come from the primary market, whereas for the other systems the prices reflect the secondary market. RGGI - the Regional Greenhouse Gas Initiative, is a cooperative, market-based system that caps emissions from the power sector in the US states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia. It was the first cap-and-invest regional initiative in the US.

Source: World Bank

Figure 3 shows where carbon prices sit and the extent of emissions captured by various ETSs and carbon taxes internationally. Uruguay had the highest carbon tax rate. Uruguay's carbon tax was first established in January 2022 and for 2022 was UYU5,645.45/tCO₂ (approximately AUD215). The tax is aimed at emissions created from fuel combustion (except jet fuel), and the rate can vary depending on inflation or fuel prices. The country currently generates more than 98 per cent of its electricity from renewable sources, primarily wind and hydropower, and is also considered one of the most electrified countries in the world.

Figure 3: Prices and coverage across ETSs and Carbon Taxes Internationally (click here to view a larger version)

Notes: Nominal prices on April 1, 2023, or most recent exchange traded or auction prices before April 1, 2023, are shown for illustrative purposes only. Only the main rate is shown for each instrument. Some instruments are not shown in this graph as current price information is not available. Prices are not necessarily comparable between instruments because of (for example) differences in the sectors covered and allocation methods applied, specific exemptions, and compensation methods. The 2030 carbon price corridor is based on the recommendations in the report of the High-Level Commission on Carbon Prices adjusted for inflation. Several jurisdictions apply different carbon tax rates to different sectors or fuels. In these cases, the included price reflects the highest general tax rate or primary fuel covered by the carbon tax. The instruments included on the x-axis reflect prices provided by each instrument. Instruments indicated with* are in jurisdictions with multiple instruments, so coverage of those jurisdictions’ total emissions may be higher than indicated by an individual instrument. The EU ETS includes 27 EU member states plus Norway, Iceland, and Liechtenstein. Several federal and subnational policies in Canada are priced at the same rate, reflecting the Pan-Canadian approach that requires all Canadian provinces and territories to have a carbon pricing system in place that aligns with the minimum national stringency federal standards. These are presented in two instruments (a carbon tax and an ETS): the carbon tax entry (Canada provinces and federal) includes the federal fuel charge, British Columbia carbon tax, and Newfoundland and Labrador carbon tax, while Canada federal and provinces (ETS entry) includes the federal Output-Based Pricing System (OBPS), Alberta Technology Innovation Emissions Reduction regulation, New Brunswick ETS, Newfoundland and Labrador Performance Standard Systems, and Saskatchewan OBPS. The coverage under Canada reflects the combined coverage of Canada’s total emissions by the included policies. Coverage estimates for subnational Mexico carbon taxes were not available-approximate estimates are included based on the fuels covered by each instrument.

Source: World Bank

A small number of jurisdictions chose to lower carbon tax rates or postpone expected increases last year as a result of public and political pressures that emerged from the extraordinary increase in energy prices that were seen in 2022. Germany postponed by 12 months its planned increase in its national ETS that was due to occur at the beginning of 2023. This also pushed out scheduled increases in 2024 and 2025 by a year. The German national ETS has been used since 2021 to complement the EU ETS by putting a carbon price on fuels that are not covered by the EU’s system. Sweden also postponed a planned increase.

Going to Farm

The report notes that New Zealand is expected to become the first country to price agricultural emissions following an announcement that a carbon price would be charged at a farm level and outside its existing ETS.  If an alternative pricing system is not implemented by 2025 the country’s Climate Change Response Act 2002 states agricultural emissions will be priced under the New Zealand ETS[i].  Almost half of the country’s greenhouse gas emissions come from agriculture, with the main source being methane from livestock digestive systems.  Now it’s proposed that around 5 per cent of emissions would be priced at the start its farm scheme with proposals to extend that over time.  Last year the NZ Government proposed a five-year price pathway for levy rates.

Denmark has reportedly suggested carbon pricing for its farming sector. Until now carbon taxes and ETSs have targeted energy and industrial emissions.  There have been concerns that capturing agriculture could impact food security, that there is limited scope to reduce emissions and carbon leakage could result, while there could also be serious challenges in monitoring, reporting and verifying emission levels.  Regardless, New Zealand stands to become a testing ground for the practicality of broadening the reach of carbon pricing internationally and for that reason it’s approach will be watched closely.

Revenue Growth

Internationally, the growth in revenue from carbon prices was more than 10 per cent last year. The bulk of the revenue raised was from the EU’s ETS (USD42 billion out of USD 95 billion). The World Bank reports that 40 per cent of the revenues raised are used for dedicated purposes and predominantly green spending while another 10 per cent is used to help the most vulnerable households and businesses. The EU’s Fit for 55 climate policy package includes a “Social Climate Fund” which will see EUR65 billion of the revenue raised go to vulnerable households, micro business and transport users through temporary direct income support and energy efficiency measures. Globally, another 20 per cent of the funds result from ETSs and carbon taxes went into general revenue last year, while there was a notable growth in the directing of funds raised to specific purposes.

The report finds that despite barriers to implementing carbon pricing in jurisdictions with low coverage, such as Africa, there is reportedly increased interest in carbon taxes and ETSs. The key reasons for this include proposals to introduce border carbon adjustments sch as the EU’s carbon border adjustment mechanism (CBAM. The Australian Government has also announced plans for a review into the feasibility of an Australian CBAM to avoid carbon leakage and with a particular focus on the steel and cement sectors.) Other factors the World Bank considers will help drive a move towards carbon pricing include expansion of the EU’s membership (which would bring more countries into the EU ETS), as well the opportunity for governments to raise revenue, which amongst other things can be used to offset impacts or invest in cleaner technologies.

[i] https://environment.govt.nz/assets/publications/Pricing-agricultural-emissions-summary-of-the-consultation.pdf