STATE & TRENDS OF CARBON PRICING 2025

Why is News : 

• The World Bank released its 2025 Carbon Pricing report, noting that:
  • 28% of global GHG emissions are now covered under carbon pricing.
• Over $100 billion in revenues have been mobilized globally via carbon taxes, trading, and credits.

What Is Carbon Pricing?

• A market-based tool that assigns a monetary cost to carbon emissions, incentivizing emission cuts.
• Internalizes externalities like climate-related disasters, health impacts, etc.

Types of Carbon Pricing Mechanisms

• Carbon Tax – Fixed tax per tonne of CO₂
• Emissions Trading System (ETS) – Cap-and-trade model for trading emissions allowances.
• Carbon Credits – Issued for verified emission reduction activities (e.g., afforestation).

Key Highlights of the 2025 Report

• Instrument Expansion: 80 systems globally (43 carbon taxes + 37 ETSs).
• India’s Progress: India’s ETS set for 2024, uses benchmark-based intensity limits instead of absolute caps.
• Rising Coverage: Now covers 28% of global emissions, up from earlier years.
• Revenue Mobilization: Over $100 billion globally in 2024.
• Sector Focus: Power > Industry > Aviation; agriculture & waste largely excluded.
• Nature-Based Credits Dominate: $14 billion (Q1–Q3 2024) raised via afforestation and land restoration.
• Tech-based Carbon Removal Growing: Innovations like Direct Air Capture (DAC), though still under-delivering.
• India, Brazil, Türkiye developing new pricing strategies.

Challenges Identified

• Uneven Sector Coverage: Major gaps in agriculture and waste sectors.
• Volatile Voluntary Markets: Uncertainty in demand, credit integrity
• Delivery Gaps: Only 318,000 tons of 8 million tons of engineered removals delivered.
• MRV Weaknesses: Poor Monitoring, Reporting, and Verification (MRV) in developing countries.
• Equity Risks: Carbon pricing may burden low-income households via fuel or power cost hikes.

Recommendations

• Expand Sectoral Reach: Use tailored strategies to bring in agriculture & waste.
• Enhance MRV: Use blockchain and satellite tech for credit transparency.
• Standardize Voluntary Markets: Harmonize bodies like Verra, Gold Standard.
• Scale Tech Solutions: Public-private partnerships for DAC and similar innovations.
• Ensure Equity: Reinvest revenues in clean energy subsidies, welfare, and health.

Significance for India

India’s domestic ETS is in progress, crucial for:

• Meeting NDC targets.
• Mobilizing green finance.
• Driving innovation in clean tech.

UPSC Relevance : 

GS Paper: GS3 – Environment; Economy; Climate Change

Mains Practice Question

Q. Discuss the role of carbon pricing as an instrument for climate mitigation. Examine the challenges and opportunities for implementing such mechanisms in India.