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What is carbon pricing?

Carbon pricing is a mechanism that harnesses market forces to create incentives for companies and countries to reduce and compensate for their emissions. 

What determines the price of carbon credits?

There are many ways to value a carbon credit. One of the critical factors that influence its price is the quality of the project. A higher cost is required to ensure that project benefits are real, long-term, and as significant as possible. Pricing can also vary by project type, size, location, and other determining factors. For instance, carbon credits from reforestation projects are more expensive than those from cookstove projects. Moreover, reforestation projects with solid conservation elements fetch higher prices than regular reforestation projects. 

Increasingly applied

According to the World Bank, priced emissions accounted for just over 20 % of emissions in 2021, up from 15% in 2020 and 5% in 2021. Most emissions, however, are not yet subject to pricing. 

Current state

The World Bank states that current prices should be between $40 and $80 per tonne of CO2 emissions to comply with the Paris Climate Agreement. But most of the time, the price is under $40.

Why is carbon pricing important?

Carbon pricing is a tool to capture the external costs of greenhouse gas (GHG) emissions – such as crop damage, health care costs, natural disaster losses, or the costs of emissions paid for by the public. It ties these emissions to their source. Usually in the form of a price on the carbon dioxide (CO2) emitted. 

At DGB, we support better pricing of CO2 emissions. This could be done by applying a price tag to multiple emissions and raising those prices over time. Organisations can do this in various ways. Introducing a CO2 tax or an Emissions Trading System (ETS) are excellent tools for companies to purchase credits to compensate for their carbon emissions.


Carbon pricing in Europe and expert insights

At the European level, much more can be achieved. The European Commission (EC) presented a comprehensive set of proposals to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in July 2021. 

Carbon pricing is an integral part of the proposal. Currently, only certain companies in the EU’s energy and heavy industry sectors pay for their carbon footprint. 

Some countries that have already implemented methods of national carbon pricing are: Argentina, Canada, Chile, China, Colombia, Denmark, the European Union (27 countries), Japan, Kazakhstan, Korea, Mexico, New Zealand, Norway, Singapore, South Africa, Sweden, the UK, and Ukraine.


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Planting trees, conserving nature and monitoring the land


Certifying & verifying our impact and creating carbon credits


Helping corporations achieve net zero by selling our offsets

World Bank Report: "Global Carbon Pricing Generates Record $84 Billion in Revenue"

"Global carbon pricing revenues increased by 60% over past year, according to latest World Bank report."

WASHINGTON, May 24, 2022Global carbon pricing revenue in 2021 increased by almost 60 percent from 2020 levels, to around $84 billion, providing an important source of funds to help support a sustainable economic recovery, finance broader fiscal reforms, or invest in communities as part of the low-carbon transition future, according to the World Bank’s annual “State and Trends of Carbon Pricing” report released today.

The report, which presents the latest carbon pricing developments around the world, finds that there are 68 direct carbon pricing instruments operating today: 36 carbon taxes and 32 Emissions Trading Systems (ETSs). Four new carbon pricing instruments were implemented since the release of the 2021 State and Trends of Carbon Pricing report: one in Uruguay and three in North America (Ontario, Oregon, New Brunswick). Countries announcing plans for new carbon pricing policies include Israel, Malaysia, and Botswana.

Carbon prices hit record highs in many jurisdictions, including the European Union, California, New Zealand, the Republic of Korea, Switzerland and Canada. However, the report finds that less than 4 percent of global emissions are currently covered by a direct carbon price in the range needed by 2030 to meet the temperature goal of the Paris Agreement.

“The past year has seen some very positive signs, such as the significant increase in revenue that can be invested in communities and in supporting the low carbon transition.There is also good progress towards resolving cross-border issues related to carbon pricing and the adoption of new rules for international carbon markets that was agreed at COP26 in Glasgow, which helps set a clearer policy direction," said Bernice Van Bronkhorst, Global Director for Climate Change at the World Bank.
“It is important now to build on this momentum and really ramp up both the coverage and the price levels to unlock the full potential of carbon pricing in supporting inclusive decarbonization.”

Key topics covered in the State and Trends of Carbon Pricing 2022 include cross-border approaches to carbon pricing, challenges and opportunities from rising energy prices, and new technologies and governance frameworks shaping carbon markets.

The report was launched at Innovate4Climate, the World Bank Group's flagship annual event on climate finance, investment, and markets, held virtually this year from May 24 to 26. Now in its sixth year, the conference brings together leaders from government, business, policy, and finance to discuss innovative climate finance solutions.
To read the report, click here.
To access the report series, click here.

Visit the Carbon Pricing Dashboard website for up-to-date information on existing and emerging carbon pricing initiatives around the world: https://carbonpricingdashboard.worldbank.org/

Ernst & Young Perspective: "How can carbon pricing help in reducing emissions?"

In brief:

  • Carbon pricing and its mechanisms were first introduced through Presidential Regulation No. 98/2021 concerning The Economic Value of Carbon.
  • Indonesia developed the instruments for carbon pricing; (1) Emissions Trading Scheme (ETS) and (2) Carbon tax.
  • Carbon pricing can take different forms in different jurisdictions, which gives different environmental impact outcomes.

Reducing emissions through carbon pricing

Carbon pricing is an approach that captures the external costs of greenhouse gas (GHG) emissions through a price on the carbon dioxide equivalent (CO2e) emitted. It is gaining momentum as one of the means to bring down emissions and drive investments into cleaner options. In Indonesia, carbon pricing and its mechanisms were first introduced through Presidential Regulation No. 98/2021 concerning The Economic Value of Carbon.

Emissions Trading Scheme (ETS) and Carbon Tax

There are two main types of mandatory carbon pricing instruments:  (1) Emissions Trading Scheme (ETS) and (2) Carbon tax. Voluntary carbon pricing is typically implemented through domestic or international crediting mechanisms and independent standards.

1. ETS caps the total level of GHG emissions that countries or businesses can emit and allows them to buy or sell units of GHG emissions to meet their emission level limits. An ETS works in the following manner:

  • The government sets a maximum level of emissions (referred to as the cap) in one or more economic sectors. It creates permits or allowances for each unit of GHG emissions.
  • The regulated entities are required to surrender one allowance for every unit of GHG emission they are accountable for. They may initially obtain permits freely, buy permits from the government, or trade with other entities, depending on the requirements of the ETS.
  • Entities whose GHG emissions exceed the cap limits are obliged to buy permits in the market, while those that cut their emissions level to below the cap may sell their unused permits to other entities or save them for future use.
  • The cap on allowances creates supply and demand in the market, resulting in a market price for allowances and subsequently incentives to reduce emissions.

The cap on emission allowances declines over time, which translates into a lower allowance supply and a higher allowance price. This creates a stronger incentive for entities to consider their emission reduction strategy ahead of time. In 2021, a trial run of an ETS was specifically initiated for coal-fired power plants in Indonesia. There were 84 coal-fired power plants involved, including PLN and IPPs, concerning a total capacity of 27.5 GW of electricity.

2. A carbon tax directly sets a carbon price by defining a GHG emission tax rate. Unlike ETS, the government pre-determines the carbon price (i.e. the tax) instead of the upper limit of emissions (cap). A carbon taxation regime works in the following manner:

  • The government sets a price that emitters must pay for each unit of GHG emission (typically one tonne of CO2e).
  • The carbon tax is charged on the total GHG emissions of an emitter to encourage emission reduction initiatives.

Indonesia is in the process of implementing a carbon tax, the principles of which are regulated through Law No. 7/2021 concerning the Harmonization of Tax Regulations. The enforcement was originally planned for 1 April 2022 and was announced to be moved to 1 July 2022, however there has been yet any confirmed implementation date until the publication of this article.

A combination of both approaches (or a hybrid approach), such as a carbon tax that is charged only on the excess over emissions cap in carbon markets or a carbon taxation regime that accepts emission allowances to lower tax liabilities, could be imposed to internalize the price of carbon.

Globally, as of April 2022, 68 carbon pricing instruments are being implemented across jurisdictions with three more scheduled for implementation. Carbon pricing can take different forms in different jurisdictions. An ETS provides certainty on the environmental impact of price fluctuations, while a carbon tax provides a fixed price with undetermined environmental outcomes.

We invest, develop and manage on-the-ground projects to originate carbon- and biodiversity credits

According to “State and Trends of Carbon Pricing” report, global carbon pricing revenue in 2021 increased by almost 60 per cent from 2020 to around $84 billion. This result provides an essential source of funds to help support a sustainable economic recovery, finance broader fiscal reforms, or invest in communities as part of the low-carbon transition future.

Another company bought credits for $3, why are yours $15?

It's important to understand that the cost of carbon credits can vary depending on a few factors, such as the type of project, the location, and the verification standards used. At DGB Group, we adhere to the highest verification standards, ensuring that the carbon offsets we provide are credible and meet the requirements of international climate programs. This rigorous process can be more expensive but is necessary to ensure the integrity of our projects. Additionally, our projects are designed to have long-lasting impacts, such as our reforestation and agroforestry initiatives, which not only sequester carbon but also promote biodiversity, prevent erosion, and support local communities. In contrast, other projects may focus on less sustainable or less impactful measures, which can result in lower prices.

Why is the project in Uganda more expensive than in Cameroon?

The cost of our projects can vary depending on the location and the specific context of each project. While both Uganda and Cameroon are in Africa, they have different environmental and social contexts that affect the implementation and cost of our projects. For example, our reforestation and agroforestry initiatives in Uganda involve planting and maintaining trees in areas with degraded land and high rates of deforestation. This requires a significant investment in land, labor, and ongoing maintenance to ensure the success of the project. In contrast, our cookstove projects in Cameroon are implemented on a smaller scale and in areas with existing infrastructure, making them easier to implement and monitor.

Why are your cookstove projects cheaper than the afforestation?

Our cookstove projects are generally cheaper than our afforestation projects because they are implemented on a smaller scale and in areas with existing infrastructure. Our cookstove projects involve distributing energy-efficient stoves to households, reducing the need for firewood or charcoal and thus decreasing emissions from cooking. These projects are easier to implement and monitor, resulting in lower costs. In contrast, our afforestation projects involve planting and maintaining trees on a larger scale, which requires a more significant investment in land, labor, and ongoing maintenance. However, both types of projects are essential for reducing emissions and promoting sustainability in their respective contexts.

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As the world’s first publicly traded purpose company focused on ecosystem restoration, DGB is harnessing market forces and the access to capital needed to accelerate Earth’s reforestation rapidly. Reach out to us to learn more about our work.

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