Carbon Pricing Response

Opinion: The essay below is the author’s personal response to a reading on carbon pricing, first published on Odinity in 2018. Its views are the author’s own and are presented as written; for the current state of carbon pricing, see the dated update at the end.

Although a relatively new policy mechanism, carbon pricing has shown some very promising potential. It has been known for quite some time that certain industrial outputs can be harmful to the environment, both on a global and regional scale, but it has taken quite some time for economists to catch on and develop policy around curbing emissions. This being such a new utensil in the economic tool kit, governments should be extremely cautious in its implementation.

Like any uncharted policy territory, one must always watch out for the law of unintended consequences. Incentives to discontinue or reduce certain industrial practices that lead to pollutants aren’t any good if it causes a switch from one environmental issue to another. For example, a policy aimed at taxing carbon outputs in the energy industry may break down if producers switch to use of natural gas, the extraction of which comes with its own share of pollutants.

The goals of such a policy should also be taken into consideration when determining the proper application. If the desire is to combat global warming, odds are such policies won’t have much effect. It would be as if trying to get extra memory on a hard drive by deleting the text files. In that case, it becomes difficult to properly set the price of a tax. Tietenberg also mentions the possibility of a global carbon policy. This may inflict huge damages on developing countries that cannot keep up with the costs of production.

In theory such carbon policy strategies look highly promising and extremely beneficial. In practice they show signs of promise, but there is no real long-term evidence to show that carbon policies are totally effective. The next decade should prove to be the ultimate test to carbon policies. The concerns above may need to be addressed in that time span, and carbon policy may go through dramatic transformation in order for it to be successful.

Update: Carbon Pricing Coverage as of 2026

Editor’s update (October 2026). Figures below are from the World Bank’s State and Trends of Carbon Pricing 2026 report (released May 19, 2026) and the IPCC Sixth Assessment Report.

• Coverage: As of 2026, direct carbon pricing covers just over 29% of global greenhouse gas emissions, about 15.6 GtCO₂e. Emissions trading systems (ETSs) cover roughly 25% and carbon taxes about 4% (World Bank, 2026).
• Number of instruments: As of the 2026 edition, 87 direct carbon pricing instruments are in operation worldwide (47 carbon taxes and 40 ETSs), seven more than a year earlier.
• Prices: As of 2026, the average direct carbon price is nearly US$21 per tonne of CO₂e, up about 7% from the 2025 edition.
• Revenue: Carbon taxes and ETSs raised more than US$107 billion for public budgets in 2025, up from below US$30 billion in 2016.
• Who is covered: As of 2026, about 31% of emissions from high-income countries and 22% from middle-income countries are covered, and none from low-income countries (World Bank Carbon Pricing Dashboard).

For context, the IPCC’s 2022 mitigation report found that by 2020 over 20% of global emissions were covered by carbon taxes or emissions trading systems, “although coverage and prices have been insufficient to achieve deep reductions” (medium confidence) (IPCC AR6 WGIII, Summary for Policymakers, B.5.2). The figures above describe how far coverage and prices have expanded since then; they do not by themselves show whether current prices and coverage are high enough to deliver deep emission cuts.

The essay’s concern about fuel switching toward natural gas is explored with U.S. data in a related Odinity article: State Efficient and Clean Energy Incentives: Effect on Natural Gas Consumption.

Sources

1. World Bank. State and Trends of Carbon Pricing 2026. Washington, DC: World Bank, 2026. Press release, May 19, 2026; Carbon Pricing Dashboard.
2. IPCC, 2022: Summary for Policymakers. In: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report. Cambridge University Press.