Carbon pricing is designed to capture the cost to society that major carbon polluters cause when adding Green House Gas (GHG) emissions to the atmosphere. Emission Trading Systems (ETSs) work on a cap-and-trade principle, whereby governments set a limit on the amount of GHGs entities can emit each year. A fixed number of allowances are put on the market that allows the holder to emit one metric ton of CO2 equivalent. These permits are either freely allocated or purchased through auctions. Firms are then able to trade these allowances with other emitters when and if they need to. The cap is reduced over time so that emissions fall. Under a carbon tax, global governments set a fixed price that businesses and industries must pay for each metric ton of CO2 (or equivalent) they emit from burning carbon-based fossil fuels in their operations.
The value of the global carbon market soared 164 percent in 2021 to a record high of 760 billion euros (approx. 825.13 billion U. S
dollars). This growth was mainly due to an increased demand for carbon permits, which culminated in surging prices. The European Union Emission Trading System is the largest carbon market based on value and accounted for roughly 90 percent of the global market size in 2021, at 682 billion euros (approx. 740.44 billion U. S dollars).
North America accounted for the second-largest share of the total value in 2021, with a market size of 49.3 billion euros (approx. 53.52 billion U. S dollars). Carbon prices across multiple emissions trading systems worldwide are expected to increase during the period of 2026 to 2030, compared to 2022 to 2026. The average EU ETS carbon price is expected to be 85.45 euros (approx. 92.77 U. S dollars) per metric ton of CO2 during the period 2022 to 2025 but is projected to rise to almost 100 euros (approx. 108.57 U. S dollars) per metric ton of CO2 during the period of 2026 to 2030, according to a survey of International Emissions Trading Association members.