Carbon pricing revenues soar, as Malawi seeks to benefit from trading framework

The World Bank’s annual “State and Trends of Carbon Pricing “report has revealed that revenues from carbon taxes and Emissions Trading Systems (ETS) have reached a record high of about $95 billion.

This is despite challenges facing governments such as high inflation, fiscal pressures, and energy crises. Carbon trading is a market-based system that aims to provide economic incentives to encourage organizations to reduce their environmental footprint.

At the COP27 summit in Egypt last year, Malawi signed a carbon trading framework with Switzerland. The agreement sought to provide mechanisms for unlocking development and resilience building in communities that have been adversely affected by climate change.

Under the agreement, Switzerland will assist Malawi reduce greenhouse gas emissions and the European country will count emission reductions in Malawi towards its own reduction target. It is estimated that the could could rake in about $100 million annually from selling carbon credits.

Speaking at the recently held Innovate4Climate conference in Bilbao Spain, Jennifer Sara the Global Director for Climate Change at the World Bank said Carbon pricing can be an effective way to incorporate the costs of climate change into economic decision-making, thereby incentivizing climate action.

“The good news from this report is that even in difficult economic times, governments are prioritizing direct carbon pricing policies to reduce emissions. But to really drive change at the scale needed, we will need to see big advances both in terms of coverage and price,’’ she added.

The report reiterates that carbon pricing is an important tool to raise revenue, direct international financial flows, and drive innovation. The Bank is of the view that as part of a broader policy package, these policies can help deliver on broader sustainability and development goals.

For instance, many of the World Bank’s core climate diagnostics, the Country Climate and Development Reports, highlight the potential for direct carbon pricing policies to support countries on their development journeys.

While the uptake of ETS and carbon taxes is on the rise in emerging economies, high-income countries still dominate.

According to the report, new instruments were implemented in Austria and Indonesia, as well as in subnational jurisdictions in the United States and Mexico. Australia is scheduled to recommence carbon pricing with a rate-based ETS due to start in July 2023 and countries including Chile, Malaysia, Vietnam, Thailand and Türkiye continue to work towards implementing direct carbon pricing.

The World Bank has been tracking carbon markets for around two decades and the annual State and Trends of Carbon Pricing report is now in its tenth year.

When the first report was published a decade ago, only 7% of global emissions were covered by either a carbon tax or an ETS. Today, as highlighted in the 2023 report, almost a quarter of global greenhouse gas emissions (23%) are now covered by 73 instruments.

An ETS places a limit on the amount of greenhouse gas emissions – it allows emitters with lower emissions to sell their extra emission units (or “allowances”) to higher emitters, thereby establishing a market price for emissions. A carbon tax, meanwhile, directly sets a price on carbon by defining a tax rate on emissions.