Countries across the world are embracing carbon pricing as a key tool to curb greenhouse gas (GHG) emissions and boost public revenues, according to the World Bank’s State and Trends of Carbon Pricing 2025 report released on June 12, 2025.
The number of carbon pricing systems worldwide has surged dramatically from just five in 2005 to 80 active systems today covering almost two-thirds of the global Gross Domestic Product (GDP). India, Brazil, and Türkiye are among nations developing new carbon pricing frameworks.
Carbon pricing mechanisms are designed to make polluters pay for the environmental damage their emissions cause, such as crop failures, health costs from heatwaves, property loss from floods, and sea-level rise. By putting a price on carbon emissions, these systems aim to hold emitters accountable while offering economic incentives to cut pollution.
Three Ways to Price Carbon
The report explains three main types of carbon pricing instruments:
•Emissions Trading System (ETS): A cap is set on total emissions, and companies can buy or sell emission allowances to meet their limits. Firms that cut their emissions can sell excess permits to others.
•Carbon Tax: Governments directly charge companies a fee based on the amount of GHG they emit or the carbon content of fossil fuels they use.
•Carbon Credit Trading: Credits are issued for projects that reduce or remove emissions, such as afforestation or capturing methane from landfills. Each credit represents one tonne of carbon dioxide equivalent.
These credits can be sold to companies wanting to offset their own emissions.
ETS Systems Expanding Globally
The World Bank identified 43 carbon taxes and 37 ETSs now in operation, generating over $100 billion annually. Together, these schemes cover about 28 per cent of global GHG emissions.
Most of the new and planned instruments are ETSs. India, for instance, established rules in 2024 for its future ETS, which will apply to the industrial sector. India’s system will be rate-based, focusing on reducing emission intensity rather than setting a fixed cap. Companies will be given performance benchmarks they must meet for net emissions.
Carbon pricing currently covers emissions mostly from the power sector, followed by industry, mining, buildings, land transport, and aviation. However, sectors like agriculture and waste management remain largely untouched by these policies.
Carbon Credits Attract Private Investment
The report also highlights the growing role of carbon credit markets, which help draw private funding for projects that cut or remove emissions. In the first nine months of 2024 alone, these markets raised an estimated $14 billion, with nature-based carbon removal projects such as afforestation claiming the largest share.
There was also a rise in credit retirements the permanent cancellation of carbon credits to balance out emissions especially from the compliance market, which accounted for nearly a quarter of global demand in 2023. The voluntary carbon market, where businesses and individuals buy credits to meet their own environmental goals, saw a slight dip in demand.
Compliance markets include:
•Domestic schemes: where firms under national ETS or carbon tax systems buy credits to meet part of their obligations.
•International schemes: like CORSIA for airlines, requiring carbon offsetting for emissions above 2019 levels.
•National climate goals: where countries buy international credits under the Paris Agreement to meet their emissions targets.
Voluntary markets are run by groups like Verra’s Verified Carbon Standard (VCS) and Gold Standard, allowing private companies to purchase carbon credits.
Interestingly, about 1 billion tonnes of carbon credits issued by these independent mechanisms remain unused globally.
Demand Rising for Carbon Removal Projects
The report shows increasing interest in nature-based carbon removal projects, such as reforestation and soil carbon storage, with credit issuances rising by 25 per cent due to growing supply and buyer interest.
There’s also growing attention on engineered carbon removal technologies like direct air capture and enhanced rock weathering. In 2024, companies made commitments to buy 8 million tonnes of these credits, but so far, only 318,000 tonnes have been delivered meaning most credits are for projects still in development.
“The majority of these purchase agreements are to support future projects that will deliver credits in the coming years,” the report noted.