Carbon is priced more expensively in Europe than anywhere else in the world. What does this mean for global efforts to reach net-zero emissions targets, and how can better data get us to a more equitable solution?
A consistent theme of our research on green and sustainable finance, including our report on carbon markets which we produced in partnership with ICE, has been the need for better data so that investors and policymakers can have useful benchmarks. We wrote, for example, that “Data gaps increase risk and uncertainty across the carbon credit value chain.” Although in this instance we were referring specifically to data on carbon credits and uncertainty around project quality in the voluntary carbon market, the point is applicable more broadly.
For example, our research noted that carbon pricing—"an approach that tries to capture the external cost of carbon emissions, while permitting the reduction of carbon emissions, and allowing emitters to bear the cost of this pollution”—is the foundation for carbon markets. These markets seek to incentivise avoidance, reduction or removal of carbon emissions; in the aggregate, they should therefore make a positive contribution to mitigating climate change. Our research focused on pricing instruments, such as carbon taxes and Emissions Trading Systems (ETSs), which influence the cost of carbon.
Our research detailed the increase over the past several decades—and particularly since 2015—in the number of carbon tax initiatives, and the commensurate rise of greenhouse gas emissions covered by such policies.
Estimated total revenue collected by carbon tax initiatives, US$bn, 1990-2021
Note: Data for a limited number of initiatives may be incomplete as they are in the process of being validated and will be updated by the World Bank following confirmation from official government sources.
Source: World Bank
But what of the actual carbon price, which is made more expensive by such taxes? An innovative new product, the Real Carbon Price Index, provides an example some of the ways in which better-quality data can facilitate financial services’ role in addressing climate change.[1] The index creates a measure of the price of carbon, taking into account both carbon taxes and ETSs—in place across different geographies.
The chart below shows how the global price of carbon has risen in line with the percentage of global greenhouse gas emission covered by carbon-tax schemes (the latter linked, of course, to the increase in the number of such schemes):
Global carbon price and greenhouse gas emissions coverage
Source: Monash University/C2Zero
The data show clearly how carbon-tax schemes quantify the previous uncosted negative externality of carbon emissions. At a global level, the price (cost) of carbon has risen from zero before carbon-pricing schemes existed to US$5.3/tonne in April 2024. This figure is a comprehensive global measure, weighted to include all jurisdictions—even ones without carbon-pricing schemes, where the price of carbon remains, in effect, zero.
Indeed, most jurisdictions still do not put an explicit price on carbon emissions; as of April 2024, 39 jurisdictions (national and sub-national) had implemented carbon taxes, according to World Bank data. Europe is home to seven out of the 10 jurisdictions with the highest carbon taxes in the world, as shown in this updated version of data featured in our report:
Highest carbon taxes by jurisdiction as of April 2024, US$/tonne
*Canada
Note: Prices are not directly comparable due to differences in coverage, compliance and compensation arrangements.
Source: World Bank
Similarly, as of April 2024, there were 36 ETSs implemented around the world: 22 at a subnational level, 13 at a national level, and one at a regional level.
The wide variation in the use and intensity of carbon-pricing schemes means that the price of carbon is very different in different parts of the world. Considering only 58 jurisdictions which have a carbon-pricing scheme (either a carbon tax or an ETS) in place, data from the Real Carbon Price Index show that as of April 2024, the European carbon price was 2.4 times as high as the global price, and nearly double the price in the Americas (the next-costliest region).
Considering the whole world, including jurisdictions with no carbon-pricing scheme, Europe’s carbon price was more than 10 times higher than the global price. The discrepancy is because only around one-quarter of jurisdictions have any type of carbon-pricing scheme in place, highlighting the extent to which at present, a small number of countries and sub-national regions are using pricing mechanisms to combat climate change.
Aggregate carbon price, global and by region US$/tonne
Note: values are monthly averages. Data reflects only jurisdictions which have a carbon-pricing mechanism in place.
Source: TheCityUK calculations based on data from the Real Carbon Price Index.
In the UK, whose ETS was implemented in 2021, following the UK’s exit from the EU[2], the carbon price initially rose and subsequently declined. Several factors are likely to have contributed to the recent fall in the UK’s carbon price, not least the July 2023 decision to increase ETS allowances between 2024 and 2027.
UK carbon price, US$/tonne
Source: TheCityUK calculations based on data from the Real Carbon Price Index.
The Real Carbon Price Index makes no claim to be comprehensive: it does not, for example, account for carbon border adjustment mechanisms or voluntary carbon markets. Nevertheless, it is a powerful demonstration of how better data can inform public and policy discussions around sustainable finance and climate change mitigation efforts.
Analysis of the index data yields some crucial insights that can help shape future policy both at the national level and in international negotiations, such as those that will occur at COP29 in Baku in November. For example:
- The global price of carbon has increased nearly six-fold over the past decade, but remains very low—and very far below the level of at least US$50-100/per tonne that is recommended to meet Paris Agreement[3] targets.[4]
- The vast majority of countries, and the vast majority of greenhouse gas emissions, are still not covered by any sort of carbon-pricing mechanism.
- Europe and North America have effective carbon prices much more closely aligned with the Paris Agreement goal of emissions reduction than other regions of the world.
This type of quantitative analysis can better inform public debate, and can arm policymakers and politicians in discussions about how to share equitably across the world the financial burden of the energy transition.
[1] I am grateful to Roger Cohen and the Real Carbon Price Index team for sharing the data on which this analysis is based.
[2] The UK was previously part of the EU ETS.
[3] The Paris Agreement of 2015 set the objective of keeping the increase in the global average temperature below 2 degrees Celsius relative to pre-industrial levels, and to limit the temperature rise to 1.5 degrees Celsius. For more detail, see TheCityUK, ‘Global carbon pricing mechanisms and their interaction with carbon markets’, p. 73, available at: https://www.thecityuk.com/media/soafzqmg/global-carbon-pricing-mechanisms-and-their-interaction-with-carbon-markets.pdf
[4] See, for example, Carbon Market Watch, ‘Pricing carbon to achieve the Paris goals’, September 2017, available at: https://carbonmarketwatch.org/wp-content/uploads/2017/09/CMW-PRICING-CARBON-TO-ACHIEVE-THE-PARIS-GOALS_Web_spread_FINAL.pdf. This range was reiterated more recently by the World Bank; see https://blogs.worldbank.org/en/climatechange/carbon-pricings-watershed-moment-leadership-coalition-reflects-6-years-paris for detail. Other organisations have estimated the necessary price to be even higher.
