Setting prices on pollution and harmful activities can be an effective instrument to tackle the unintended impacts of society’s consumption and production decisions. Governments can “price” environmental impacts by directly taxing activities that cause them, or by creating market-based mechanisms like emissions trading schemes. 

Applying a price to these impacts can ensure that they are properly accounted for in planning and decision-making processes, placing the cost of pollution on polluters and, ultimately, helping to reduce environmental harm and ensure the benefits of a healthy, livable planet. 

Expanded carbon pricing will aid the transition to a low-carbon future. Setting prices makes carbon-intensive activities more expensive, incentivizing pollution reduction or the development of alternative, lower-emission technologies. 

Carbon prices, which typically cover carbon dioxide (CO2) and equivalent greenhouse gases (GHG), can be calculated for various objectives. For example, prices can reflect GHG emissions’ impacts or costs to society (referred to as the social cost of carbon), or target an amount to incentivize the economy to meet specific GHG targets.

In market economies, carbon prices tend to encourage the most economical emissions reductions first. Although direct pricing by itself is not sufficient to reach the mitigation objectives of the Paris Agreement, it can complement a broader toolkit of climate standards and investments. 

Similarly, environmental taxes and fees focused on other types of non-carbon pollution and waste can curb unsustainable practices, protecting ecosystems and low-income communities. These policies can shift behavior to help reduce pollution and environmental degradation.

Even if pricing schemes are progressive — with wealthier people paying proportionally more of the costs than poorer ones — the burden of such policies on vulnerable communities must be evaluated and mitigated. Governments can recycle revenue from pricing policies as direct transfers. They can also use revenues to support a broad range of policies that support poor communities, address regional disparities and manage shifts in employment opportunities from polluting to less-polluting industries.

Data Insights

What targets are most important to reach in the future?

Systems Change Lab has identified 4 targets to track progress. Click a chart to explore the data.

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Systems Change Lab has identified 10 factors of change that may catalyze or impede progress. Click a chart to explore the data.

Progress toward targets

Systems Change Lab has identified 4 targets target to track progress. Explore the data below.

Average global direct carbon price in nominal US dollars

The global weighted-average carbon price is currently about $15/tCO2e; however, the IPCC estimates that an average global price of at least $170/tCO2e by 2030 is needed to limit warming to 1.5 degrees C (2.7 degrees F).

Under existing carbon pricing regimes, the global weighted-average carbon price is currently about $15 per metric ton of CO2 equivalent (tCO2e). Estimates from the latest Intergovernmental Panel on Climate Change (IPCC) report state that a much higher global carbon price will be required to limit warming to 1.5 degrees C (2.7 degrees F) — at least $170/tCO2e by 2030 (approximately a 12-fold increase of the global average) and at least $430/tCO2e by 2050 (nearly a 30-fold increase). 

Put another way, the average price for carbon will need to increase by roughly $27 per year between 2022 and 2030 to reach the target. This would mean an acceleration of more than 10 times the historic rate. These targets will not be met by direct carbon pricing alone. They will be reached by a combination of direct pricing and complementary policies that implicitly price carbon by incentivizing a transition from high-carbon activities to low-carbon activities. Nevertheless, they underscore that the gap between current direct prices and the incentives needed to reach the 1.5 degrees C (2.7 degrees F) goal is still enormous.

Share of global GHG emissions covered by direct carbon pricing

All greenhouse gas (GHG) emissions should be covered by a carbon price. According to the World Bank, only about 23% of global GHG emissions were covered by a direct carbon price as of 2022.

Directly pricing all GHG emissions is an important policy tool to reduce emissions and protect the climate. It is an economically efficient mechanism that allows market forces to direct efforts to least-cost mitigation options first. Even if prices are often not adequately high to reduce the scale and pace of emissions enough to limit warming to 1.5 degrees C (2.7 degrees F), they can still help limit emissions. As with any policy, the efficacy and practicality of carbon pricing will vary across geographies and sectors. However, expanding carbon pricing regimes can enhance their economic efficiency benefits. It can also prevent emissions from migrating from jurisdictions where emissions are priced to places where they are not (known as carbon leakage).

According to the World Bank, only about 23% of global GHG emissions were covered by a direct carbon pricing regime as of 2022. By 2030, all GHG emissions should be covered by at least some level of carbon pricing, even at levels below the minimum range consistent with the 1.5 degrees C (2.7 degrees F) pathway. To reach this target, coverage will need to grow about 10 percentage points per year, nearly triple the historical rate.

Share of GHG emission covered by carbon prices consistent with 1.5-degrees-C pathway

According to the latest IPCC report, to avoid the most significant impacts of climate change, GHG emissions should be priced at least $170/tCO2e by 2030 to limit warming to 1.5 degrees C (2.7 degrees F).

According to the latest Intergovernmental Panel on Climate Change (IPCC) report, GHG emissions should be priced at least $170/tCO2e by 2030 and $430/tCO2e by 2050 — either by direct pricing or other policies that create an implicit price — in order to limit warming to 1.5 degrees C (2.7 degrees F) and avoid the most significant impacts of climate change. 

In 2021 the World Bank estimated that direct carbon pricing schemes covered about 23% of global GHG emissions. However, none of the direct pricing schemes were priced at levels consistent with the 1.5-degrees-C (2.7-degrees-F) pathway. In order to meet those targets, a higher percentage of global GHG emissions needs to be covered by some form of carbon price, whether direct or indirect. Given their outsized share of responsibility for historical emissions, developed countries must play a leading role in the implementation of direct carbon pricing schemes. 

Environmental tax revenue

According to Principles for Responsible Investment and the U.N. Environment Programme Finance Initiative, global environmental externalities that result from air pollution, natural resource use and waste are expected to reach $7.8 trillion annually by 2050.

The production and consumption of goods and services often create waste and pollution, harming the ecosystems that sustain human society. 

When these environmental harms are not reflected in the cost of goods and services, producers and consumers shift the costs of their harmful activities to society at large. These socialized costs are often referred to as “externalities.” Externalities create inefficient use of resources from an economic perspective. More importantly, their damage is often inequitable, disproportionately impacting under-resourced, under-represented communities. 

According to Principles for Responsible Investment (PRI) and the UN Environment Programme Finance Initiative (UNEP-FI), global environmental externalities that result from air pollution, natural resource use and waste are expected to reach $7.8 trillion annually by 2050. Governments can intervene and reduce negative externalities by implementing environmental taxes on activities that generate such external damages. Taxes help internalize environmental costs. 

Data from the Organisation for Economic Co-Operation and Development (OECD) indicates that environmentally related taxes for air pollution, biodiversity and the ocean amounted to $261 billion globally in 2018. As environmental tax regimes expand and enforcement improves, revenue from these regimes should increase. Then, as they encourage behavior to shift away from harmful activities, revenue should eventually decline.

Enablers and barriers

We monitor momentum by tracking a set of 10 factors factor that can enable or prevent progress. Explore the data and learn about key actions driving progress.

Number of countries covered by emissions trading systems and carbon taxes

Innovation
As of April 2022, 46 countries were covered by a carbon tax or an emissions trading system. Of these, 28 countries had a carbon tax and 38 countries an ETS.

Two of the most common ways to implement a direct carbon pricing regime are via emissions trading systems (ETS) or carbon taxes.

ETS, also referred to as cap-and-trade, limit total emissions by issuing tradable emissions allowances, which emitting firms can buy or sell. A cap-and-trade program establishes a carbon price by limiting the total quantity of emissions and letting a firm’s willingness to pay create the carbon price (unlike carbon taxes, through which the government sets the price).

ETS programs are thus different from carbon taxes because they guarantee a certain level of emissions reductions, rather than a certain price. Both carbon taxes and ETS systems can be effective in reducing emissions if designed and implemented well. As of April 2022, 46 countries were covered by a carbon tax or an ETS. Of these, 28 countries had a carbon tax and 38 countries an ETS.

Total market value of carbon trading via emissions trading systems

Innovation
Thanks to higher traded volumes and increasing prices, the total market value for carbon trading reached $790 billion in 2021, 2.6 times higher than the previous year according to Refinitiv.

Greater participation in carbon trading via ETS can support greater GHG emissions reductions. When an ETS is established, the total emissions cap is set and allowances are allocated to participants in the market. Participants trade permits from firms that can reduce emissions cheaply to firms whose emissions reductions are expensive. 

Carbon prices under ETS systems still trade below the minimum prices prescribed for a 1.5-degree-C (2.7-degree-F) pathway. However, thanks to higher traded volumes and increasing prices, the total market value for carbon trading reached $790 billion in 2021. According to Refinitiv, this was 2.6 times higher than the previous year and a new record high.

Turnover increased in all major ETS markets but most prominently in Europe, the world’s largest ETS by traded value, where prices more than doubled from 2020. According to Refinitiv, expectations that emissions caps will get stricter from renewed climate pledges by governments have led to higher demand for allowances, thereby increasing prices. Further policy commitments should drive prices and trade higher.

Number of companies with internal carbon prices (planned and implemented)

Leadership
According to the CDP, in 2020, 853 companies globally had incorporated internal carbon pricing, a 22% increase from 2019.

Companies can internalize the cost of carbon in several ways. They can apply hypothetical direct carbon pricing in their business planning, calculate the implicit carbon prices of their internal investment choices, or even use real carbon fees or trading schemes across their operations to shift incentives internally and raise funds for sustainability initiatives. 

Corporate internal carbon prices help companies manage the impacts that emissions could have on their financial performance. They can provide a competitive advantage over other companies and improve strategic decision-making to address climate-related risks. Implementing internal carbon pricing also helps companies evaluate various investment options according to their potential carbon impact — such as whether to invest in natural gas or renewable energy — and plan their long-term emissions-reduction trajectories. 

In 2020, 853 companies had incorporated internal carbon prices in some capacity, a 22% increase from 2019. The median internal carbon price was $25/tCO2e in 2020. 

More companies are planning to implement internal carbon prices in the next two years — a sign of growing momentum toward a low-carbon economy. In 2020, the CDP found that 1,159 global companies planned to implement an internal carbon price within two years, a 26.6% increase from the previous year. Considering both companies with internal carbon prices and those with plans to implement them, there were 2,012 companies with carbon pricing intentions of some kind in 2020.

Companies’ plans for internal carbon prices need to be implemented, and they need to be more than analytical exercises, as is often the case. Firms should apply carbon prices to investment decisions in order to reduce their emissions.

Amount of revenue recycling from direct carbon pricing schemes recycled for environmental and equity goals, including ameliorating impacted communities and mitigating climate change

Regulation and Incentives
The Institute for Climate Economics reported that out of 34 countries and regions analyzed, $66 billion in carbon revenue recycling went toward tax exemptions, direct transfers, and earmarked for green or development projects in 2021.

Implementing a direct carbon price (via tax or ETS) that is regressive can impact low-income households disproportionately and impose unfair burdens with higher living costs. Often, carbon pricing impacts are not evenly felt across society. For example, increased fuel prices as a result of carbon pricing could hit poor communities hard when energy constitutes a large portion of their overall spending. 

Revenue raised via carbon pricing can be recycled and allocated toward policies that create positive societal and environmental outcomes, offsetting some of the uneven distributional impacts of carbon pricing in communities that are most adversely affected. It can also be used to mitigate climate change and reduce reliance on fossil fuels, earmarking funds to green infrastructure or a climate investment fund, for example.

There is evidence of public support for revenue recycling to fund infrastructure, renewable technologies, low-income programs and tax rebates while reduction of corporate taxes and fiscal deficits are very unpopular. To increase the likelihood that a carbon price will be both equitable and politically enduring, governments need to set revenue recycling schemes that ameliorate the costs for impacted communities and tackle climate change. 

In 2021, 34 countries and subnational regions with carbon revenue recycling programs analyzed by the Institute for Climate Economics recycled about $66 billion toward tax exemptions (such as tax credits and tax cuts), direct transfers (including distributions to households), and earmarks for green or development projects (for example, infrastructure and climate funds). More detailed breakdowns of how carbon revenue is being used for environmental and equity purposes will be included once data is available.

Number of environmentally related tax instruments and fees/charges on air pollution

Regulation and Incentives
Environmentally related taxes and fees on air pollution were in place in 57 countries in 2021 according to the OECD.

Atmospheric air pollutants, including sulfur and nitrogen oxides, are major drivers of rain and soil acidification, respiratory diseases, heart disease and stroke. Since 1979, international agreements such as the Convention on Long-Range Transboundary Air Pollution have created binding emissions-reduction commitments.

In order to penalize polluting industries and promote the adoption of low-emission processes, governments have implemented taxes on air pollutants. Examples include charges on vehicle exhaust, motor fuels and heating from fossil fuels. 

As these kinds of taxes and fees expand globally, national governments can price pollution properly and shift industries toward clean energy. Air pollution taxes can also serve as gateways to carbon pricing. In 2021, 57 countries had environmentally related taxes and fees on air pollution.

Number of environmentally related tax instruments and fees/charges on harm to the marine environment

Regulation and Incentives
According to the OECD, 28 countries had environmentally related taxes and fees on the ocean in 2021, including taxes and fees on wastewater, fishing practices, endangered species and shipping.

From ocean acidification to overfishing, the health of our ocean is in rapid decline. It can be restored through the sustainable management of fisheries, tourism and development, and a reduction in pollution and plastic debris. 

Financial instruments such as taxes can be implemented to internalize the environmental costs  of harm to the marine environment. To preserve marine ecosystems, countries have adopted taxes and fees on wastewater, harmful fishing practices and maritime transportation, and added protections for endangered species. 

Data from the OECD indicates that 28 countries had environmentally related taxes and fees related to the ocean in 2021. These not only align incentives but can also generate revenue for marine restoration projects. 

Number of environmentally related tax instruments and fees/charges on waste

Regulation and Incentives
In 2021, as reported by the OECD, there were 51 countries with environmentally related taxes and fees on waste management, which promote circular business models and waste reduction.

Effective waste management is critical to address the environmental and public health consequences of waste degradation, which often disproportionately affects under-resourced communities. 

Projections from the World Bank indicate that waste generation may exceed 2 billion metric tons a year by 2025. In areas of growing urbanization, annual waste generation may reach 3.88 billion tons by 2050. Landfills emit an estimated 11% of global methane emissions, a greenhouse gas that absorbs about 80 times as much heat as CO2 over 20 years.

Waste management taxes and charges internalize the negative environmental externalities associated with trash generation and capture its social cost. They can increase the cost of landfill dumping and disincentivize consumption of non-biodegradable products. 

By charging industries for waste production, governments encourage polluters to adopt more circular business models. At the same time, consumers become more conscious of the importance of reducing waste. According to the OECD, 51 countries had environmentally related taxes and fees on waste management in 2021.

Number of environmentally related tax instruments and fees/charges on water pollution

Regulation and Incentives
The OECD reports 36 countries with environmentally related taxes and fees on water pollution in 2021, incentivizing industries to meet water-quality standards and reduce wastewater disposal.

Water pollution is a major global issue. It degrades vital freshwater resources, harms aquatic ecosystems and wildlife and affects human health. Industries discharge millions of tons of toxic wastes and heavy metals every year, and according to the Food and Agriculture Organization (FAO), “80 percent of municipal wastewater is discharged into water bodies untreated.”

Wastewater taxes and fees combat water pollution. They can raise the costs for firms that dump water pollutants and heavy metals into sewage treatment plants, thereby incentivizing industries to meet water-quality standards and reduce wastewater disposal. In 2021, ​​​​​​​36 countries had environmentally-related taxes and fees on water pollution. The more countries adopt water pollution taxes, the more likely it is that oceans and fresh water will remain clean and productive.

Number of countries with national-level taxes and charges on single-use plastics and plastic bags

Regulation and Incentives
According to UNEP, there were 59 countries that had taxes and charges on single-use plastics and plastic bags in 2018.

From packaging to water bottles, plastic is ubiquitous in our lives — but its convenience has come at the expense of our natural environment and human health.

UNEP estimates that as many as five trillion plastic bags are used globally every year, adding to the 400 million metric tons of plastic waste produced annually. A significant portion of plastic waste is dedicated to food packaging: about one million plastic bottles are bought every minute. Out of the seven billion tonnes of plastic waste generated so far, less than 10% has been recycled. As a result of plastic waste mismanagement, 9 to 14 million tons of plastic enter the ocean every year. Plastic pollution eventually impacts local water sources, food safety and public health.

In order to combat plastic pollution, governments have imposed charges on single-use plastics (bottles, straws, cups, cutlery, etc.) and other plastic products, including microplastics. Taxes on plastic polymers will increase costs, and thereby aim to shift consumer demand away from single-use products and motivate companies to invest in sustainable alternatives. Examples of substitutes include compostable plastics or durable materials such as metal or glass. According to UNEP, as of 2018, 59 countries had taxes and charges on single-use plastics or plastic bags.

Number of countries with biodiversity-relevant taxes, fees, charges and tradable permits

Strong Institutions
The number of countries with biodiversity-relevant charges has increased from 13 in 1980 to 50 in 2021, and as of 2021, 26 countries had biodiversity-relevant tradable permits.

The post-2020 global biodiversity framework identified the need to increase biodiversity finance by at least $200 billion per year by 2030, including $10 billion to developing countries per year. Governments can ensure that financial resources move toward biodiversity protection by eliminating harmful subsidies that result in negative environmental impacts, and by developing incentives for conservation and protecting biodiversity. 

The Organisation for Economic Co-operation and Development (OECD) tracks three main types of economic instruments related to biodiversity that can generate revenue: biodiversity-relevant taxes, fees and charges, and tradable permits.

Biodiversity-relevant taxes — which include taxes on pesticides, fertilizers, forest products and timber harvests — impose a cost to use natural resources to compensate for the related harms caused. An increase in these types of taxes should incentivize more sustainable behaviors and practices. As of 2021, there were 62 countries with biodiversity-relevant taxes; the number of countries with these taxes has remained relatively stable since 2010.

Biodiversity-relevant fees and charges can range from hunting license fees to charges on sewage discharge. Such fees discourage the overuse or abuse of public resources that could damage biodiversity. The number of countries with biodiversity-relevant fees and charges increased from 13 in 1980 to 50 in 2021.

Biodiversity-relevant tradable permits include tradable quotas for fisheries, tradable hunting rights and tradable development rights. Such permits can restrict the use of natural resources while providing individual licenses to users that can be traded. If permits are auctioned, they can raise additional revenues that can be earmarked for biodiversity goals. As of 2021, 26 countries had biodiversity-relevant tradable permits.