Proposals for effective carbon pricing – leakage and linkage considerations
Choose an element
- Select a language
- English
Since 2021, ICC has drawn on the experience of its global members to develop core principles and guidance for the effective design of carbon pricing instruments. In this third report, building on our past work, ICC provides guidance to governments and policymakers to address carbon leakage, promote linkage for greater international cooperation and make carbon pricing systems more efficient.
Go directly to:
Contact us
Why is carbon pricing considered important to reduce emissions?
Putting a price on carbon represents an important way for governments to drive emissions reduction, needed to achieve the goals of the Paris Agreement. The goal is to discourage the use of carbon dioxide–emitting fossil fuels to protect the environment.
As a result, carbon pricing is gaining momentum globally, with over 70 carbon pricing systems in existence and studies showing that 80% of countries have expressed interest in using international market mechanisms to meet their climate targets. This broad range of carbon pricing systems has created a fragmented international climate policy landscape, compounded by administrative complexity.
What is ICC doing to support policymakers in their approaches to carbon pricing?
As local and regional carbon pricing instruments are being put in place, there is a growing risk of shifting emissions outside the countries that take action to mitigate emissions domestically. Several countries and regions, which have led change on carbon pricing, have introduced measures or are planning to do so to mitigate the risk.
Recognising the growing concern around the risk of leakage, ICC provides guidance for governments and policymakers to support the development of effective carbon pricing policies that allow countries to increase cooperation – which can ultimately lead to increased climate ambition. ICC is convinced that international cooperation is essential to develop a consistent and coherent international approach built on broader principles for effective emission reduction.Such an approach is key to creating a global framework that better facilitates cross-border trade, investment and economic growth.
ICC key messages on carbon pricing at a glance
- Carbon pricing is an essential tool for comprehensive climate policy packages. It can assist governments in achieving existing nationally determined contributions at the lowest possible cost, scaling up investment for further climate mitigation and adaption efforts and ratcheting up ambition.
- The overriding common objective of carbon pricing should be to reduce greenhouse gas emissions. The development of sustained and robust carbon markets maximises the effect of carbon pricing in achieving that objective.
- When developing, designing and implementing national carbon pricing approaches, governments are encouraged to build on the ICC Carbon Pricing Principles and other existing guidance to increase effectiveness, minimise risks related to carbon leakage and promote linkage for greater international cooperation and coordination.
- Any approaches to prevent carbon leakage should be considered and designed carefully and proportionately and without compromising trade rules.
- National legal, regulatory and policy frameworks for carbon pricing market mechanisms should consider (i) linkage across national and sub-national compliance mechanisms to prevent greenhouse gas emissions leakage between countries; (ii) broader linkages between domestic compliance mechanisms, Article 6 mechanisms and the voluntary carbon markets, and (iii) broader climate, energy, trade and taxation policies.
- Article 6 of the Paris Agreement on cross-border emissions trading itself is not designed to lead to a global carbon price. However, with the right operating rules, it has the potential to create the necessary transparency to forge a more cohesive multilateral approach to carbon pricing.
Related reports on carbon pricing
The role of voluntary carbon markets in mobilising finance to accelerate climate action (2024)
The report highlights the importance of engaging in and scaling voluntary carbon markets as a complement to achieve global net-zero emissions and mobilise critical financial resources to support climate action.
Carbon pricing and inflation (2023)
This report, launched at the margins of COP28 in 2023, analyses the effect of carbon pricing on inflation and aims to determine whether higher carbon prices accelerate inflation and if so, for how long. It also considers the role of monetary and fiscal, as well as carbon pricing as part of a policy mix to mitigate inflationary shocks.
Critical design features for effective carbon pricing: A business perspective (2022)
This 2022 report carefully assesses select carbon pricing case studies from Canada, New Zealand, the European Union Emissions Trading System, Indonesia and South Africa through the lens of the foundational ICC Carbon Pricing Principles. It does so with a view to determine key design features and their significance for governments seeking to implement new carbon pricing mechanisms or improve existing measures.
ICC Carbon Pricing Principles (2021)
The foundational ICC Carbon Pricing Principles, released in 2021, propose core principles and recommendations to help policymakers design carbon pricing policies within effective climate policy frameworks for implementation at national, regional and international levels. The principles should form an essential part of national and international carbon pricing approaches including the development of market-based instruments under Article 6 of the Paris Agreement.
Browse the ten principles
FAQ
Carbon pricing is an approach to reducing carbon emissions that uses market mechanisms to pass the cost of emitting on to emitters. The two principal carbon pricing mechanisms are carbon taxes and Emission Trading Systems (ETS). The goal is to discourage the use of carbon dioxide–emitting fossil fuels to protect the environment, address the causes of climate change, and meet national and international climate agreements.
Carbon leakage is considered a result of asymmetrical and fragmented carbon policies, price differences, sector coverage and the resulting carbon cost. Carbon leakage occurs when businesses transfer their production to other countries with laxer emission constraints. If emissions are shifted to another jurisdiction with less stringent decarbonisation policies, carbon leakage can undermine a country’s unilateral efforts to reduce its emissions and the effectiveness of carbon pricing.
