Countries are increasingly adopting carbon pricing, which now represents almost two-thirds of global Gross Domestic Product, according to a World Bank report titled State and Trends of Carbon Pricing 2025.
The number of operational carbon pricing instruments has grown significantly, from 5 in 2005 to 80 today, with India, Brazil and Turkey actively developing them.
Carbon pricing is an instrument that makes companies pay for the hidden costs of greenhouse gas (GHG) emissions. These are external costs that the public pays for, such as damage to crops, healthcare costs from heat waves and droughts, and loss of property from flooding and sea level rise. Carbon pricing shifts that responsibility to the polluters.
Three types of carbon pricing instruments are covered in the report, i.e., Emissions trading system (ETS), carbon taxes and carbon credit trading mechanisms.
An ETS involves governments setting a limit, or cap, on the amount or intensity of GHG emissions generated by emitters. Companies are allowed to trade emission units to meet their targets. If they implement internal measures to lower their emissions, they can sell these units to other emitters.
A carbon tax explicitly prices carbon by defining a tax rate on GHG emissions or the carbon content of fossil fuels. Governments can levy this fee on companies for their GHG emissions.
A crediting mechanism allows the trading of credits (each representing 1 tonne of carbon equivalent) generated through activities that reduce emissions (e.g., capturing methane from landfills) or remove them (e.g., sequestering carbon through afforestation). Companies can then purchase these credits to offset their own emissions.
Governments see carbon pricing not only as a tool to reduce emissions, but also as a potential source of revenue for fiscally constrained governments. “Carbon pricing remains a powerful tool for advancing multiple policy goals,” said Axel van Trotsenburg, World Bank Senior Managing Director. “It helps countries cut emissions, raise domestic revenues in tight fiscal environments, and stimulate green growth and job creation. Carbon credit markets can also help mobilise private capital and channel funds to development priorities,” Trotsenburg added.
The World Bank notes that carbon pricing mobilised over $100 billion for public budgets in 2024—over three times higher than a decade ago in real terms—despite a slight drop from 2023 due to lower prices in large ETSs like the EU and UK. Over half of carbon revenues generated in 2024 were earmarked for environment, infrastructure and development projects, helping strengthen fiscal stability and support low-carbon growth, particularly in developing economies.
Carbon Markets Gain Momentum
Carbon pricing revenue reached $104 billion in 2023 and is expanding rapidly in middle-income countries, according to the World Bank.
India, for instance, is laying the foundation for a national carbon market, with a full-fledged Carbon Credit Trading Scheme expected around mid-2026, according to Financial Express.
