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 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, where the volume of fossil fuel
consumed is used as a proxy to estimate carbon GHG emissions and the tax rate is based on the carbon content of different fossil fuels.
Examples: About 20 nations use this approach including South Africa, Japan, Sweden, France and Argentina.
2. Carbon Tax on Direct Emissions from Facilities
This system introduces a tax per unit of carbon emissions which are emitted directly at a business facility. Facilities which emit GHGs are identified. Government establishes a monitoring, reporting and verification (MRV) system to collect GHG emissions data from the 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 businesses. 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. Market trading of the ETS allowances establishes the emissions price.
Governments can organize auctions to put a price on the emissions allowance at the time of issuing them to businesses and generate public revenue. Some governments allow businesses to purchase carbon credits to offset a part of their emissions. Governments can introduce a penalty for businesses for every ton of emissions for which allowances were not purchased. Ideally, government should reduce the cap on emissions over time, in phases.
Examples: China, Germany, Kazakhstan, 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 remain similar to cap-and-trade ETS with cap on absolute emissions.
Example: India’s Carbon Credit Trading Scheme (CCTS) which is being operationalized from 2025
5. ETS – Baseline & Credit mechanism
In a baseline-and-credit system, the national government establishes a baseline for the GHG
emissions of businesses in an industry, 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. Governments can choose to have a penalty baseline as well which can be the same or different than the emissions baseline.
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 various sectors. Examples: Switzerland and Mexico
8. Government-administered Carbon Crediting Mechanism
9. Border Carbon Adjustment Measure (BCAM)
When a national government or supranational entity introduces a carbon pricing scheme for
businesses, there are risks of carbon leakage and loss of competitiveness of domestic businesses in both domestic and international market. To avoid this offshoring of emissions, governments can consider introducing a border carbon adjustment measure, which puts the domestic carbon price on imported goods at the time of their import, based on the GHG emissions caused by them at the time of their manufacturing.
Example: European Union’s Carbon Border Adjustment Measure (CBAM)
Intergovernmental Systems
10. Supranational ETS
A supranational ETS like the EU ETS involves similar causal interactions between businesses like
the Cap-and-Trade ETS. The difference lies in the entity administering the carbon pricing system which in this case would be a supranational entity instead of a national
government.
Example: European Union
11. Interlinked ETS
Emissions Trading Systems can be linked together to create larger and more liquid carbon markets. 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 ITMOs can be issued by a member state (host state) and purchased by another member state. The mitigation outcomes of an ITMO will undergo a ‘corresponding adjustment’ i.e. they will count towards the NDC of the purchasing state and not the host state which has generated and sold it.
Examples: Japanese Joint Crediting Mechanism and Swiss Article 6 Agreements
13. ITMOs – Article 6.4 Authorized Emissions Reductions
Article 6.4 of the Paris Agreement seeks for the establishment of a centralized
‘Supervisory Body’ at the UNFCCC which would approve emissions reduction projects of
member states to be called as Article 6.4 Emissions Reductions (A6.4ERs). If a country sells
A6.4ERs to another member state to count towards its NDCs, or to business to count towards its obligations under an international offsetting scheme like CORSIA or other international purposes, then it would be considered as an ‘Authorized A6.4ERs’ or ITMO.
14. Article 6.4 Non-Authorized Emissions Reductions
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
The IMO Net-zero Framework is the first in the world to combine mandatory emissions limits and GHG pricing across an entire industry sector. Approved by the Marine Environment Protection Committee during its 83rd session (MEPC 83) from 7–11 April 2025, the measures include a new fuel standard for ships and a global pricing mechanism for emissions. These measures, set to be formally adopted in October 2025 before entry into force in 2027, will become mandatory for large ocean-going ships over 5,000 gross tonnage, which emit 85% of the total CO2 emissions from international shipping.
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 which create projects for avoidance or removal of GHG emissions. These projects are verified by independent standards agencies 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 (Favasuli &
Sebastian, 2021). The integrity of this market has come under question though, due to scams
involving false projects for which carbon credits were issued, and consequently there has been a
drop in the price of carbon credits in this market (Payton, 2024).
About the Author
Mohit Choube
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.
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