#31 The Case for Climate Optimism: The Increase of Carbon Pricing
With the Summer in full swing, I wanted to try my hand at a few solo-episodes on topics I have been thinking about. Here is one based on why you can likely be a bit more optimistic about climate change than you currently because of three reasons: increase in the coverage of emissions by carbon pricing, the increase in average carbon price, and developments like CBAM.
This episode is based on the World Bank Report “State and Trends of Carbon Pricing 2026”, available at https://www.worldbank.org/en/publication/state-and-trends-of-carbon-pricing
For questions, comments or suggestions, you can contact me at arvid.viaene.ce@gmail.com
Transcript
Recently, I had a couple of conversations with people working in climate policy and they were feeling discouraged. They felt that there’s a lot more push back on climate policy, that there are less funds available and that some initiatives are either canceled or scaled back substantially. But in this episode, I want to make a case for climate optimism. And not because the push back isn’t real, but because there has been a big big win in climate policy in the last decade. And that win is that there’s a great increase in carbon coverage and carbon pricing.
In this episode, I will tell you that you can probably be a bit more optimistic than you currently are for three reasons. First, the total emissions covered by carbon price is increasing. Second, the global average carbon price itself is increasing as well. And third, there are dynamic effects that are going on like EU CBAM regulations that are only going to further encourage carbon coverage.
I’m going to cover what’s happening, why it’s happening, and then also kind of give you a couple of insights you might not be aware of. Now, for those of you who are more the glass half empty type, I will also provide some caveats at the end of the episode if you want to keep a gloomy outlook.
Let’s start with the coverage of emissions by tax or emissions trading system. In 2016, according to the World Bank, global carbon taxes and emissions covered around 12% of global greenhouse gas emissions. So about 1 in 10 of emissions was covered, but in 2026, according to the World Bank—so only like 10 years—we now cover 30% of global greenhouse gas emissions. That is a big, big change. It means that now we are very close to 1/3 of global emissions being covered by some form of a direct carbon price.
The fact that it’s covered does not mean that it’s strongly priced, and of course there’s also 70% that it’s not covered. But it does mean something huge already: it means those 30% emissions are inside a system where there’s monitoring, reporting, verification, and a compliance obligation that firms or people have to meet. There’s an institution now that can be adjusted, tightened, and expanded. In climate policy, that matters a lot because the first step is often building the machine. It can take quite a long time to set up an Emissions Trading System (ETS) and can require a lot of political capital, but once the systems are in place, they can then be more easily expanded.
One of the big reasons behind the expansion is that China and India, who together account for around 40% of emissions in 2026, have started to implement an ETS. China’s ETS came into effect five years ago in 2021 and India only just launched its ETS for carbon last year in 2025. In addition, Japan’s ETS has entered its mandatory phase, Vietnam has an ETS in effect, and Brazil and Turkey are also preparing policies for upcoming ETS programs. These new systems are often not very stringent in the beginning, relying on intensity benchmarks or free allocation, but you gradually ramp up the stringency. A weak system naturally can become stronger once the things are in place.
The second argument for the win is that carbon prices have gone up. The World Bank reports that the average carbon price across implemented carbon taxes and emission trading systems has roughly doubled over the last decade, going from 10pertonofCO2in2016tonearly∗∗21 in 2026**. While $21 per ton is not a very high global carbon price compared to economic literature estimates of $100 to $280, relatively small prices can still have big impacts. For example, a $21 price can encourage power plants to switch from coal to natural gas, leading to a big decrease in emissions.
The main driver behind the increase in coverage is Emissions Trading Systems. Carbon tax coverage has stayed relatively stable at around 4 to 5% of global emissions, while ETS coverage has tripled since 2016. A carbon tax has the word “tax” in it, making it politically difficult to implement. We saw this with the European Union in the ‘90s, China’s Ministry of Finance in 2010, and movements like the yellow vests in France. ETSs can be more complicated mechanically, but that complexity makes them politically easier to implement because price increases in industries like the power sector are harder for consumers to see and organize against. Furthermore, ETSs provide a gradual path for increasing stringency, moving from free allocation to auctioning.
The third reason for optimism is the development of the EU’s Carbon Border Adjustment Mechanism (CBAM). While its direct emissions coverage is small, its political effect is large. It tells foreign exporters that if their product is carbon intensive and there is no equivalent carbon price paid at home, they may face a carbon cost at the EU border. This incentivizes foreign governments to implement their own ETS so that the revenue goes to the foreign government rather than to the EU. This could lead to a “climate club” of countries implementing carbon taxes, as suggested by Nobel Prize winner Bill Nordhaus.
I have presented a case for why you could be more optimistic about climate change and climate policy, looking at developments in China, India, Japan, Turkey, and Brazil. Now, for the caveats: 70% of emissions are still not covered, particularly in hard-to-reach sectors like agriculture, transport, and housing. Political durability is also not guaranteed, and carbon pricing can be reversed. Carbon pricing isn’t the highest yet, and we need to see absolute caps rather than intensity benchmarks.
The goal of this episode was to show that from a global perspective of carbon coverage and carbon pricing, developments are very promising. I really hope that in a decade from now I can do the same episode giving you much, much better numbers still. Thank you for tuning in
