After experiencing the hottest year on record in 2023, our planet crossed the 1.5°C threshold on a 12-month average for the first time in January 2024. While the world grapples with the escalating impacts of climate change, the urgent need for effective mitigation strategies has never been clearer. As governments around the world move to implement climate policy frameworks, emissions trading systems (ETS) emerge as pivotal tools in the global fight against climate change, offering a market-based approach to reducing greenhouse gas emissions.

More and more governments worldwide are choosing to adopt ETSs, but challenges remain

Governments worldwide are increasingly embracing emissions trading as a key part of their policy response to the climate crisis. Currently, 36 systems are in force globally, with an additional 22 in various stages of consideration and development. The systems currently in force collectively cover 18% of global GHG emissions. Jurisdictions making up 58% of global GDP have an ETS in place and roughly one-third of the global population lives under an ETS in force.

The global momentum behind the development and implementation of new ETSs is particularly striking in emerging economies. In Latin America, Brazil has taken significant steps by proposing a draft law for the implementation of an ETS, while Argentina mulls the adoption of a carbon market for its energy sector. Mexico is operating a pilot program, which is expected to move to full implementation over the course of 2024. Chile and Colombia have gained experience from the implementation of carbon taxes and are now at different stages of considering and preparing for the implementation of an ETS.

Across the Asia-Pacific region, India has outlined a pathway towards establishing a carbon market framework, which includes a compliance ETS alongside voluntary crediting activities, while Indonesia has recently launched an ETS covering the power generation sector. Vietnam is planning to launch an ETS pilot in the coming years and several other countries in the region, including Malaysia, Pakistan, the Philippines, and Thailand, are at different stages of considering or developing an ETS. Additionally, Türkiye is making plans to initiate a pilot ETS over the course of 2024, further emphasizing the global momentum towards emissions trading.

Similarly, developed economies have demonstrated their commitment to emissions trading. Canada, for example, has unveiled plans for a federal cap-and-trade system specifically designed for the oil and gas industry, complementing the output[1]based pricing systems in place at the federal level and in several provinces. Meanwhile, the European Union has announced the introduction of a distinct ETS for buildings, road transport, and additional sectors, complementing the EU ETS coverage. The new system is scheduled to commence operations in 2027. Australia has reformed its climate policy framework, turning the Safeguard Mechanism into a baseline-and-credit system, and Japan has launched the GX-ETS, a voluntary system expected to transition to a compliance ETS in the coming years.

At the subnational level in the US, Washington State launched a cap-and-invest program in 2023, New York State and Colorado are actively working to develop and launch new systems, and Maryland is considering an economy-wide system.

Despite the notable progress, setbacks have arisen due to complex political settings, as evidenced by challenges in the Regional Greenhouse Gas Initiative, in Pennsylvania, North Carolina, and Oregon. These setbacks underscore the importance of finding effective solutions to emerging challenges, especially in fostering social acceptance of carbon pricing. Overcoming these obstacles will be pivotal in achieving the goal of net zero by mid-century.

Innovative system designs are emerging

The design and development of new ETS is giving rise to a generation of hybrid and innovative systems, sometimes deviating from the traditional cap-and-trade blueprint. This shift showcases the adaptability of emissions trading to diverse challenges and opportunities specific to geographical, economic, and political contexts. Notably, intensity-based emissions trading systems are on the rise, including the Chinese national ETS, and the output-based pricing systems in place in Canada both at the federal and subnational level, with several others being developed or considered.

This new wave of ETSs also incorporates fresh design elements, blending various carbon pricing instruments as seen in Indonesia’s “cap-tax-and-trade system” or mixing compliance and voluntary features, as seen in Japan and India, where voluntary systems are implemented as a first step towards the development of compliance ETSs over time.

In response to these transformations, ICAP has broadened the scope of its annual Status Report to reflect the evolving emissions trading landscape. While maintaining focus on compliance systems, this year’s report includes a greater number of intensity-based systems and other ETS types not previously covered. The carbon pricing landscape is further explored in the Infographics section. These diverse variations play a crucial role in promoting ETS uptake in new geographies by tailoring and adapting the concept to local priorities and circumstances.

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