17 Types of Carbon Pricing and Market Systems

by Mohit Choube, 05 July 2025

Do you know, there are more than 17 types of national and international carbon pricing and market systems? In this article, we give you a concise description of these varied systems along with real-world examples. While most of these are already operational at different locations around the world, some are still under development.

Depending on the nature of governing entities, these 17 systems can be categorized as Government-administered Systems, Intergovernmental Systems and Private Systems.

Government-administered Systems

1. Carbon Tax on Fuels

This system introduces a tax per unit of fossil fuels consumed, and the quantity of fossil fuels consumed is used as a proxy to estimate GHG emissions. The tax rate is based on the carbon content of different fossil fuels.

Examples: About 20 nations use this approach including South Africa, Sweden, France and Argentina.

2. Carbon Tax on Direct Emissions from Facilities

This system introduces a tax per unit of carbon emissions emitted directly by an industrial facility. Government identifies the industrial facilities which emit GHGs, and establishes a monitoring, reporting and verification (MRV) system to collect GHG emissions data from such facilities.

Examples: Singapore, Poland and Chile.

3. ETS: Cap & Trade – Cap on ‘absolute emissions’

In such a system, the government puts a cap on the total emissions of a business. Businesses are required to purchase allowances issued by the government for each ton of GHG emissions. Businesses which emit less than the cap can sell their remaining allowances and these allowances can be purchased in the ETS market by those businesses whose emissions are higher than the cap. Trading of the allowances in the ETS market determines their price, hence this system is a type of Emissions Trading System (ETS).

Governments can organize auctions to put a price on the emissions allowance at the time of issuing them to businesses and generate public revenue. Governments can also choose to give away the allowances for free. Governments can introduce a penalty for businesses for every ton of emissions for which allowances were not purchased. Ideally, governments must reduce the cap on emissions over time, in phases.

Examples: China, Germany, Mexico, Montenegro, Austria, New Zealand, Republic of Korea, the United Kingdom and Switzerland.

4. ETS: Cap & Trade – cap on ’emissions intensity per unit product’

In such a system, the government puts a cap on the emissions intensity per unit product manufactured by businesses. Other features are similar to cap-and-trade ETS with cap on absolute emissions.

Example: India

5. ETS: Baseline & Credit mechanism

In such a system, government establishes a baseline for GHG emissions of businesses, based on their historical emissions. Businesses which emit less than the baseline are eligible to get credits for the emissions avoided below baseline and they can sell them to those businesses whose emissions are above the baseline. Unlike cap-and-trade, there is no cap in this system which needs to be complied by businesses. Governments do not generate additional public revenue by sale of allowances, though revenue can be generated in case of a penalty system.

Examples: Japan and Australia

6. Hybrid Systems: ETS with a Carbon Price Floor

In such systems, the price stability of a carbon tax is used to introduce stability in the price signal of a cap-and-trade ETS. Such a mechanism is also referred to as ‘Carbon Price Floor’.

Examples: Netherlands and Poland

7. Hybrid Systems: ETS with a Carbon Tax

In such a system, a Carbon Tax and ETS co-exist within the same jurisdiction. They complement each other by covering different sectors, based on suitability of each system to different sectors.

Examples: Switzerland and Mexico

8. Government-administered Carbon Crediting Mechanism

Such systems create a government-administered market for carbon credits, where each credit represents one tonne of GHG emissions avoided or removed. The carbon credits are listed on a registry managed by the government and follow the project methodologies and standards established by the government. These credits can be used by businesses to ‘offset’ a certain percentage of their GHG emissions, while complying with a carbon tax system or an emissions trading system.

Examples: India, Australia, Canada, and Chile

9. Border Carbon Adjustment Measure (BCAM)

A carbon pricing system can cause carbon leakage (offshoring of high-emissions businesses) or loss of competitiveness of domestic businesses in both domestic and international market. To avoid this, a government can consider introducing a border carbon adjustment measure, which puts the domestic carbon price on imported goods.

Example: European Union’s Carbon Border Adjustment Measure (CBAM)

Intergovernmental Systems

10. Supranational ETS

A supranational ETS is similar to a national ETS. The difference, however, lies in the entity administering the carbon pricing system which in this case would be a supranational entity instead of a national government. As a result, the trade of emission allowances can occur between businesses of two or more nations.

Example: European Union

11. Interlinked ETS

Emissions trading systems of multiple nations can be linked together to create a larger and more liquid carbon market. In an interlinked ETS, allowances can be traded between businesses operating in two different ETS. The allowances can be permitted to flow either in just one direction or in both directions.

Examples: Norway, Iceland, Liechtenstein & EU; Switzerland & EU

12. ITMOs – Article 6.2 mechanism

Article 6.2 of the Paris Agreement allows for bilateral or multilateral cooperative approaches where Internationally Transferred Mitigation Outcomes (ITMOs) can be issued by a nation (host) and purchased by another nation which is a party to the agreement. ITMOs correspond to GHG emissions avoidance or removal projects which have received a Letter of Authorization (LoA) by the host nation. The mitigation outcomes of an ITMO must undergo a ‘corresponding adjustment’ i.e. they will count towards the Nationally Determined Contributions (NDCs) of the purchasing nation and not the host nation which has generated and sold the ITMOs.

Examples: Japanese Joint Crediting Mechanism and Swiss Article 6 Agreements

13. ITMOs – Article 6.4 Authorized Emissions Reductions

The Paris Agreement Crediting Mechanism (PACM) has been established under Article 6.4 of the Paris Agreement. It replaces the Clean Development Mechanism (CDM) which was created by the Kyoto Protocol. Carbon credit projects involving avoidance or removal will be listed on a central registry managed by the UNFCCC. Such carbon credits are referred to as Article 6.4 Emissions Reductions (A6.4ERs). If a nation sells A6.4ERs to another nations to count towards their NDCs, or to foreign businesses, or to businesses in general for their obligations towards an international offsetting scheme like CORSIA, then such A6.4ERs would be considered as ‘Authorized A6.4ERs’ or ITMOs. Such carbon projects must receive Letter of Authorization (LoA) by the host nation.

14. Article 6.4 Non-Authorized Emissions Reductions

Unlike ‘Authorized A6.4ERs’ which are ITMOs, ‘Non Authorized’ A6.4ERs can count towards the host nation’s NDCs. Businesses in the host nation can use A6.4ERs to offset their GHG emissions for complying with carbon pricing systems like carbon tax or ETS. Businesses which are not under carbon pricing schemes can also voluntarily purchase A6.4ERs to offset their GHG emissions.

15. CORSIA – Carbon Offsetting and Reduction Scheme for International Aviation

UNFCCC deals with GHG emissions of member states at the domestic level. Therefore, the GHG emissions caused by international aviation are not accounted into the NDCs, and they have to be addressed separately by International Civil Aviation Organization (ICAO). ICAO has introduced the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) which has set a baseline for GHG emissions of the international aviation industry and requires airline operators to offset their emissions which go beyond this baseline. For the first phase of CORSIA (from 2024 through 2026), the baseline is 85% of CO2 emissions from international aviation covered by CORSIA for the year 2019.

The scheme follows a ‘route-based approach’ where emissions are only accounted for compliance if both the state from where the flight departs and the state at which the flight arrives are participating in CORSIA. These states are required to establish MRV systems for reporting the emissions caused by international flights. The state where the airline is registered does not matter.

16. IMO’s Carbon Pricing Mechanism for International Shipping

Just like aviation, GHG emissions caused by international maritime transport are not accounted into the NDCs. The International Maritime Organization (IMO)’s Net-zero Framework was approved by the Marine Environment Protection Committee during its 83rd session (MEPC 83) from 7–11 April 2025. It includes measures like a new fuel standard for ships and a global pricing mechanism for emissions. These measures are set to be formally adopted in October 2025, after which they would come into force in 2027, and will apply to large ocean-going ships over 5,000 gross tonnage.  

Private Systems

17. Voluntary Carbon Market

This is an initiative taken by the private sector which also involves putting a price on every ton of CO2eq avoided or removed. The voluntary carbon market (VCM) involves project developers who create projects for avoidance or removal of GHG emissions. The projects are verified by independent standards agencies (e.g. Verra, Gold Standard, etc.) which issue carbon credits to the project developer for every ton of CO2eq avoided or removed, and record them onto their registries. Project developers sell these credits to finance their projects. These credits are purchased by businesses which wish to offset their GHG emissions, often via online carbon credit exchanges, traders and brokers, or over the counter.

Note: All views expressed in this article are those of the author and do not represent the official position of BTG Sustainability Services Private Limited.

About the Author

References

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