What is carbon pricing?
Carbon pricing is one of the most widely used tools for reducing carbon emissions. Governments and markets around the world rely on it to give carbon a clear, measurable cost, so the price of emitting is felt where business decisions are made.
Understanding how carbon pricing works is now part of sound commercial planning. This guide walks through the main mechanisms, the systems operating today, and the practical steps companies take to stay competitive as carbon prices rise.
Top view at tree seedlings in a tree nursery, Hongera Reforestation Project, Green Earth.
Carbon pricing is a mechanism that puts a monetary value on carbon emissions. It rests on a straightforward principle: the organisations that emit carbon should carry the cost of the impact those emissions have. By attaching a price to each tonne of carbon dioxide (CO2) released, carbon pricing turns an environmental cost that markets have long overlooked into a real figure companies can see and act on.
Read more: The real cost of 1 tonne of CO2: Translating carbon into hectares
Economists describe this as internalising an external cost. Emissions cause damage that the emitter has not traditionally paid for, and carbon pricing corrects that by making the cost visible. This gives every company a direct financial reason to measure, reduce, and take responsibility for what it emits.
Carbon pricing usually covers greenhouse gas (GHG) emissions measured as carbon dioxide equivalent, so a single price can apply across the range of gases that drive changing environmental conditions. Two broad approaches dominate: carbon taxes, which set a price directly, and carbon markets, which cap emissions and let the price emerge through trading. Both share the same aim of steering money and effort towards cleaner ways of operating.
Read more: Cracking the code of carbon pricing: How does it work?
How carbon pricing works
Carbon pricing takes several forms, and most economies combine more than one. The approaches below cover the systems a business is most likely to meet, from direct taxes to the voluntary purchase of carbon credits.
Carbon taxes
A carbon tax places a direct charge on carbon emissions, usually set per tonne of carbon dioxide. The rate reflects the carbon content of a fuel or activity, so higher-emitting choices cost more and cleaner ones cost less.
The strength of a carbon tax is its predictability. Companies know the price in advance, which makes long-term investment in cleaner equipment and processes easier to justify. Governments gain a steady source of revenue that can fund energy efficiency, nature restoration, and support for households affected by higher costs.
Norway offers a long-running example, applying one of the world's highest carbon taxes to emissions from its offshore oil and gas sector and steadily pushing operators towards cleaner technology.
Close up on a tree nursery worker planting a tree, Hongera Reforestation Project, Green Earth.
Emissions trading systems (cap-and-trade)
An emissions trading system (ETS), often called cap-and-trade, sets an overall limit on the emissions allowed within a market and issues allowances up to that cap. Each allowance permits the holder to emit a set amount, and the total number of allowances falls over time.
Companies that cut emissions quickly can sell spare allowances to those that need more time, so reductions happen first where they are cheapest to achieve. This design gives governments certainty over the total volume of emissions and gives business flexibility over how to meet its obligations. The price of an allowance moves with supply and demand, sending a market signal that rewards early action.
The European Union Emissions Trading System (EU ETS), launched in 2005, is the reference example and the largest carbon market of its kind. Many later systems borrow its cap-and-trade structure.
Read more: The interconnected world of carbon: exploring key carbon market concepts
A local with an energy-efficient cookstove, Hongera Energy Efficient Cookstoves Project, Green Earth.
Voluntary carbon markets
The voluntary carbon market (VCM) sits alongside these compliance systems. Here, companies choose to buy carbon credits from projects that reduce or remove emissions, rather than being required to by law. Each credit represents one tonne of carbon dioxide reduced or removed, verified against an independent standard.
Read more: What business leaders need to know before buying carbon offsets
Prices in the voluntary market reflect the quality and character of the project behind each credit: its location, the standard it meets, the permanence of the carbon stored, and the wider benefits it delivers for nature and communities. Credits from high-quality nature-based projects, such as reforestation and agroforestry, command a premium because they restore ecosystems and support livelihoods alongside reducing emissions.
Read more: The rising demand for nature-based credits
For many businesses, buying high-quality carbon credits is the most direct way to take responsibility for emissions they cannot yet eliminate and to channel finance into nature restoration.
Read more: The role of carbon credits in business: benefits, challenges, and future outlook
Hybrid approaches
Many jurisdictions combine elements of taxes and trading to capture the advantages of each. A government might run an emissions trading system with a floor price, so the market keeps its flexibility and companies still gain the certainty of a minimum cost. These hybrid designs are becoming more common as systems mature and policymakers adapt them to local conditions.
Carbon pricing around the world today
Carbon pricing has moved from a handful of pilot schemes to a core part of economic policy. According to the World Bank's State and Trends of Carbon Pricing 2025, around 28% of global carbon emissions are now covered by a direct carbon price, and jurisdictions representing roughly two-thirds of global GDP have adopted a carbon tax or an emissions trading system. Together these instruments raised over $100 billion for public budgets in 2024.
A group of locals participating in a seedling delivery, Hongera Reforestation Project, Kenya, Green Earth.
Average prices are climbing as caps tighten and coverage widens. They remain below the level many economists consider necessary to meet international goals, and the direction of travel is clear: broader coverage, higher prices, and steadily closer connections between systems.
Read more: Carbon credit price guide: Understanding spot, forward, and market factors
The European Union
The European Union operates the most developed carbon pricing framework. The EU ETS covers power generation, heavy industry, and aviation, and remains the highest-priced of the major systems. From 1 January 2026, the EU's Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase, placing a carbon cost on imports of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen, so that goods produced outside the EU face a price comparable to those made within it.
A second system, known as ETS2, extends carbon pricing to the fuels used in road transport and buildings, with trading due to begin in 2027. [source to confirm — European Commission] A Social Climate Fund runs alongside it to help households manage the change. For companies that trade with Europe, these measures make the carbon content of products a direct commercial concern.
Read more: The next carbon standard: What CBAM and CSRD mean for European businesses
Asia
Asia is now the centre of gravity for carbon pricing by volume. China runs the world's largest emissions trading system; starting with the power sector in 2021, it has since extended the scheme to steel, cement, and aluminium, lifting its coverage to more than 60% of the country's carbon emissions. South Korea has operated an economy-wide emissions trading system since 2015, one of the first anywhere. Japan brought a mandatory national system online in 2026 after several years of voluntary trading, and India and Vietnam are following with national systems of their own, extending carbon pricing across much of the region.
Close-up of a local holding a tree seedling, Hongera Reforestation Project, Green Earth.
North America
North America prices carbon through a patchwork of state, provincial, and federal schemes rather than a single national market. In the United States, California extended its cap-and-trade programme, now renamed Cap-and-Invest, out to 2045; the Regional Greenhouse Gas Initiative (RGGI) prices power-sector emissions across a group of north-eastern states; and Washington State runs its own Cap-and-Invest programme, with work under way to link the west-coast markets. Canada prices carbon mainly through industrial pricing for large emitters, following the removal of its consumer fuel charge in 2025, on a rate that rises on a set schedule towards 2030. Mexico has piloted a national emissions trading system since 2020 and is moving it towards full operation.
Read more: What business leaders need to know before buying carbon offsets
South America
Latin America is moving from voluntary activity towards regulated carbon pricing. Brazil passed a landmark law in 2024 establishing the Brazilian Emissions Trading System (SBCE), a cap-and-trade scheme being phased in over several years, with agriculture exempt and forestry set to earn credits. Chile and Colombia have run carbon taxes since 2017, and Mexico combines its emissions trading pilot with a national carbon tax. Together with the region's strong natural carbon potential, these systems make Latin America increasingly central to global carbon finance.
Oceania
In Oceania, Australia prices carbon through its Safeguard Mechanism, which sets declining emissions baselines for the country's largest industrial facilities and lets them trade credits for over- or under-performance, covering more than a quarter of national emissions. New Zealand runs one of the world's longest-standing emissions trading systems, the NZ ETS, and is unusual in bringing forestry fully inside the scheme, so landowners both carry obligations and earn units for the carbon their forests remove.
Aerial view on tree nursery, Hongera Reforestation Project, Green Earth.
Africa
Africa's role in carbon markets is growing on both sides of the ledger. South Africa operates the continent's main carbon tax, in force since 2019 and now in its second phase, applied to large industrial and energy emitters. Several other African economies are building the frameworks to host and sell high-quality carbon credits. Because much of the world's most cost-effective nature restoration takes place here, the continent is central to the supply of nature-based credits even where domestic carbon prices are still emerging.
Carbon pricing and global environmental goals
Carbon pricing is central to international cooperation on emissions. It gives countries a common measure of effort and a practical way to direct finance towards the reductions that matter most.
Read more: Carbon pricing: global solutions for a global challenge
Article 6 of the Paris Agreement
The Paris Agreement sets a shared aim of holding the rise in global temperatures to well below 2°C above pre-industrial levels, with efforts to limit it to 1.5°C. Article 6 of the agreement provides the framework for countries to cooperate through carbon markets in reaching these targets.
Article 6 works through two main routes. Article 6.2 lets countries trade emissions reductions directly with one another through bilateral agreements, using units known as internationally transferred mitigation outcomes (ITMOs). Article 6.4 establishes a centralised carbon market overseen by the United Nations, now called the Paris Agreement Crediting Mechanism (PACM). Both routes reached their operational stage over 2024 and 2025, giving companies and governments clearer, more credible channels for cross-border carbon transactions. [source to confirm — UNFCCC]
Read more: Who's who in the carbon market: Key institutions and frameworks and what they do
What carbon pricing means for business
Carbon pricing changes the economics of nearly every industry. The effect depends on how carbon-intensive a business is and how exposed it is to the systems described above, and companies that plan ahead turn a rising cost into a competitive advantage.
The impact is felt in two ways: the direct cost of emissions under a tax or trading system, and the indirect cost carried through supply chains and traded goods. Both reward the same response — measuring emissions accurately and reducing them at the source.
Sector-specific impact
The weight of carbon pricing falls differently across the economy:
- Energy and utilities: pricing accelerates the shift to renewables and energy efficiency as the cost of high-emitting generation rises.
- Transport: operators face growing pressure to improve efficiency and adopt electric and alternative fuels, particularly as systems such as ETS2 extend pricing to road transport.
- Manufacturing: energy-intensive producers invest in cleaner processes to protect margins, and border measures such as CBAM sharpen the focus on the carbon embedded in materials.
- Agriculture and forestry: pricing rewards sustainable land management and creates income from carbon stored in soils and trees.
- Clean technology: businesses developing low-carbon solutions benefit from rising demand and investment.
Read more: How forest carbon credits are changing the wood market
A local working on a field, Hongera Reforestation Project, Green Earth.
Every sector also depends on energy, and the fast growth of data centres and artificial intelligence is adding new demand that carbon pricing will increasingly shape.
Read more: Powering AI responsibly: the role of carbon compensation
Practical strategies for business
Companies adapt to carbon pricing by reducing emissions and managing their exposure to cost. Effective steps include:
- Improve energy efficiency: cut consumption and emissions through better equipment and processes.
- Shift to renewable energy: lower emissions and reduce reliance on volatile fuel prices.
- Compensate for hard-to-abate emissions: use high-quality carbon credits to take responsibility for emissions that cannot yet be removed.
- Strengthen the supply chain: measure and reduce emissions across suppliers, where much of a company's footprint sits.
- Set an internal carbon price: apply a notional price to emissions in investment decisions, so future costs shape choices today.
- Report transparently: share progress with investors, customers, and regulators using credible data.
Taken together, these steps help a business stay competitive as carbon prices climb, and they turn compliance into a clear signal of leadership.
Read more: Carbon footprint offsetting strategies: How leading companies neutralise their emissions
The companies that fare best treat carbon pricing as a standing part of strategy rather than a one-off cost, revisiting their plans as systems tighten and prices move.
Read more: How to stay ahead of the curve on sustainability
A local woman cooking on a energy-efficient cookstove, Hongera Energy Efficient Cookstoves Project, Green Earth.
The road ahead
Carbon pricing continues to broaden and deepen. Several trends are shaping what comes next:
- Wider coverage: systems are expanding into sectors and gases they once left out, and new schemes keep launching.
- Rising prices: as caps tighten, prices are expected to climb towards levels that reflect the true cost of emissions.
- Border measures: mechanisms such as CBAM are extending the reach of carbon pricing across trade and encouraging cleaner production worldwide.
- Closer links between systems: governments are aligning rules and connecting markets, moving towards a more consistent global price.
- A larger role for nature: carbon pricing increasingly recognises nature-based solutions, directing finance towards reforestation, soil carbon, and ecosystem restoration.
This last trend matters most for the natural world. As prices rise and markets mature, the value of protecting and restoring ecosystems becomes easier to measure and easier to fund.
Read more: Beyond tonnes: How carbon credit co-benefits elevate value
For businesses, the message is consistent: the cost of carbon is set to grow, and the returns on acting early grow with it.
Read more: High-quality carbon credits vs regular carbon credits: what sets them apart?
Portrait of Bulindi's beta male, Bulindi Chimpanzee Habitat Restoration Project, Green Earth.
Green Earth: turning carbon pricing into nature restoration
Carbon pricing gives the world a practical way to reduce emissions and a mechanism to fund the restoration of nature. At Green Earth, we turn that mechanism into lasting impact on the ground, developing projects that put the value of carbon to work for ecosystems and communities.
Read more: The hidden strength of nature-based credits in corporate decarbonisation strategies
We design and manage large-scale reforestation, afforestation, and energy-efficient cookstove projects that restore ecosystems, protect biodiversity, and support the communities that depend on them. These projects generate high-quality carbon credits, verified against leading standards, which companies use to compensate for emissions they cannot yet eliminate. Because our projects deliver benefits for nature and people alongside carbon, our credits are among the most sought-after in the market.
A local woman during work in a tree nursery, Hongera Reforestation Project, Green Earth.
As carbon prices rise and carbon markets mature, the case for restoring nature grows stronger. We help companies navigate this landscape, from measuring their carbon emissions to sourcing credits that stand up to scrutiny, so that a cost on carbon becomes a contribution to a thriving planet. Together, we can build a future where protecting nature and running a successful business move in the same direction — sustainability through nature.
