Global Regulatory Landscape of Carbon Pricing Mechanisms

Carbon pricing, once an environmental policy dating back to 1997 and the Kyoto Protocol, has gradually moved into the mainstream of economic regulations. With its different types, it became the central element of fiscal, trade, and industrial policy. Governments worldwide are implementing more advanced measures, and working on a unified approach, urging businesses operating across jurisdictions to understand not only the price signal but the legal architecture and operational demands that accompany it.

The Shift from Environmental Measure to Market-Shaping Mechanism

Like many other environmental or green taxes, carbon pricing started as a textbook solution to market failure. More specifically, its initial purpose was to place a price on greenhouse gas emissions so that emitters account for the social costs of their emissions. However, in practice, the instrument's role broadened, and governments started using carbon prices to generate revenue, protect domestic industry, and steer investment toward low-carbon technologies.

The revenue dimension of carbon pricing became dominant, and the instrument's primary purpose is no longer to penalize polluters but to raise revenue that governments actively allocate to specific purposes. Notably, revenue generated is most commonly used to fund green infrastructure projects, such as renewable energy, public transport, and energy-efficient buildings. Additionally, the funds are directed to households to offset higher energy costs or provide fiscal relief, such as reducing other taxes or supporting vulnerable sectors. 

Main Carbon Pricing Types and Forms

As explained in the first article from this series, carbon pricing refers to any initiative that sets an explicit monetary value per ton of CO₂ or CO₂-equivalent. However, this can take different forms, leading to the development of several types of carbon pricing. The most common ones are the emissions trading system (ETS), carbon tax, crediting mechanism, results-based climate finance (RBFC), and internal carbon pricing. 

Emissions Trading System (ETS)

The ETS is a market-based approach that allows companies to trade emission units to meet their greenhouse gas reduction targets at the lowest cost. To achieve this goal, companies can either reduce their emission internally or buy allowances from the market, depending on which option is cheaper. 

The ETSs are typically established in cap-and-trade or baseline-and-credit forms. With the first one, governments set an absolute emissions limit and distribute allowances to match that cap. Under the second form, credits are issued to businesses that reduce emissions below a defined baseline and can sell them to others who exceed their limits.

Carbon Taxes

In contrast to ETSs, carbon taxes have a fixed price per ton of CO₂ or per unit of fuel, leaving the emission reduction outcome uncertain but providing certainty about the cost of emitting.

Crediting Mechanisms

The crediting mechanism works by generating carbon credits from verified emission reductions in projects or programs, which are traded domestically or internationally to meet compliance obligations or corporate sustainability goals.

Results-based Climate Finance (RBFC)

When governments adopt and implement RBFC-type carbon pricing, funding is provided after verified climate-related outcomes, such as emission reductions, are achieved, often with additional social or community benefits.

Internal Carbon Pricing

Even though internal carbon pricing is not a type of carbon pricing that governments use, it is worth mentioning as a significant form of carbon pricing. This type is typically used by businesses to guide strategic and operational decisions regarding climate risks and opportunities, often reflecting the prices they face under mandatory carbon regulations or anticipated future increases.

The Current Global Carbon Pricing Landscape

In their recent reports, the World Bank and International Carbon Action Partnership highlighted that the global footprint of carbon pricing has expanded substantially over the last decade. Even though most of the global emissions fall under explicit carbon pricing instruments, with both carbon taxes and ETSs proliferating across regions, in total, this represents less than half of total emissions. However, the number of countries implementing these instruments is rising. 

Notably, governments select the type of carbon pricing that best fits the national circumstances, political considerations, economic priorities, and institutional capacity. The most commonly used types are ETS and carbon taxes, often even combined. Currently, 80 carbon taxes and ETSs are in operation worldwide, comprising 38 ETSs and 43 carbon taxes. 

Two new ETSs were developed in the US in recent years, specifically in Colorado and Oregon. Additionally, three new carbon taxes took effect: a fuel-based carbon tax in Israel and two local carbon taxes introduced in Mexico City and the state of Morelos. Furthemore, Taiwan entered its first compliance period for its carbon tax in 2024, with payments due in 2026, and Portugal brought back its carbon tax after a suspension.

The EU, with its Carbon Border Adjustment Mechanism (CBAM), Canada, China, Japan, Mexico, and the UK already operate carbon pricing systems, and many middle-income countries have moved forward rapidly over the past year. The UK also announced that it will introduce CBAM in 2027, following the EU's example. This confirms that countries are continuously working on these mechanisms and instruments and that these systems are not static. 

For example, Canada introduced new regulations that ended the federal fuel charge, which in turn led to the removal of British Columbia’s subnational carbon tax and the discontinuation of Saskatchewan’s output-based pricing system. China, in contrast, expanded ETS coverage to industrial sectors, increasing global direct carbon pricing coverage from 24% to around 28%.

Some countries, including  Argentina, Mexico, and Uruguay, apply carbon taxes at different rates across fuels. Although labeled as carbon taxes, these non-uniform schemes operate more like indirect pricing tools, as they do not apply a single, consistent price per ton of emissions.

Risks, Opportunities, and Mitigation Strategies for Businesses

As previously explained, the main difference between ETS, carbon taxes, crediting mechanisms, and RBCF, on one side, and the internal carbon pricing, on the other, is that the former are official government instruments and mechanisms, and the latter affects the company’s internal planning and strategy, without creating any legal obligation or market transaction.

Nonetheless, more and more businesses are adopting internal carbon pricing to anticipate the impact of mandatory carbon costs, prepare for policy changes, and identify strategic risks and opportunities associated with the transition to cleaner production. Some of the most commonly mentioned risks include future rate escalation, tighter caps, divergent monitoring, reporting, and verification standards, and border measures that raise costs for exporters.

Non-compliance results in litigation and tax disputes, which represent an additional legal exposure as carbon costs become material to transfer pricing and customs valuations. Nevertheless, all of these represent an opportunity for businesses that proactively invest in emissions measurement, energy efficiency, and low-carbon inputs.

Businesses that accept new rules and regulations early on have an opportunity to capture demand for low-carbon products, benefit from preferential treatment under some border regimes, and monetize reductions through trading or offset frameworks where permitted. This is especially true for businesses operating in countries in the implementation phase, such as Brazil, India, Indonesia, and Turkey.

Conclusion

Carbon pricing is no longer a policy that businesses can comply with voluntarily or ignore, but rather a fast-evolving regulatory ecosystem with fiscal, trade, and industrial consequences. Thus, companies must treat carbon pricing as a core element of both legal and commercial strategy.

From mapping exposures across jurisdictions to investing in credible measurement and reporting systems, to aligning product and supply-chain decisions with the realities of a world where carbon costs are increasingly embedded in prices and trade rules, businesses must have a clear, efficient plan.

Source: World Bank, OECD - Effective Carbon Rates 2025, OECD - Supplement to Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down, UNDP, Government of Canada, International Carbon Action Partnership