Well-designed incentives not only motivate change and signal the directions for the change needed, they also enable it.
If economic incentives push counter to the energy transition any efforts will be fighting an uphill battle. Firms with small profit margins cannot take costly actions if their competitors don’t need to.
Emissions Pricing Instruments
Implemented well, emissions pricing could help mobilize more than 50% of the investment needed to meet global climate targets over the next decade.
Emissions pricing can help address the challenge of getting sufficient clean investment, accelerating the retirement of fossil fuel facilities and infrastructure and changing production systems in the Global South. Emissions pricing instruments include taxes or emissions trading systems, and carbon markets created under international agreements such as the Paris Agreement or CORSIA (the system for emissions from international aviation). The UNFCCC has an excellent primer on carbon pricing.
Extensive research shows that carbon taxes and emissions trading systems (ETS) have significantly reduced greenhouse gas emissions globally. As of early 2026, there were 43 carbon taxes and 37 ETSs in operation covering 28% of global greenhouse gas emissions. For a current list of jurisdictions involved in emissions pricing, refer to the World Bank’s State and Trends of Carbon Pricing Dashboard.
Explaining emissions pricing instruments
Different types of emissions pricing instruments aim to create a price signal on greenhouse gas (GHG) emissions, making participating in the energy transition attractive for firms in the Global South.
Two leading approaches are emissions trading systems and carbon taxes.
Emissions trading systems
An ETS is a tradable-permit system for GHG emissions and sometimes referred to as ‘cap and trade’. It sets a limit (the cap) on the GHG emissions that can be emitted. Entities covered by the ETS need to hold one emission unit (allowance) for each tonne of GHG emitted, but entities have the flexibility of selling and buying emission units. The total number of emission units reflects the size of the cap in the ETS. Under this approach, the price on emissions will depend on the balance between demand (the total emissions) and the supply (the emission units allocated and available to market participants). An emissions trading systems handbook is here.
Examples: Some emerging markets and developing economies, such as China, India, Indonesia, Kazakhstan and Mexico, have introduced domestic emissions trading systems, and an increasing number are developing or considering them. Examples as of 2026 include Brazil, Chile, Colombia, Pakistan, Türkiye and Vietnam.
Carbon tax
A carbon tax on fossil fuel or other industrial emissions creates a price signal felt broadly across the economy, thereby incentivizing a move away from carbon-intensive production. This results in a total reduction of emissions. Unlike an ETS, a carbon tax cannot guarantee achievement of a GHG target but instead ensures certainty around the size of the short-term price signal on emissions. A carbon tax guide by the World Bank is here.
Examples: Argentina, Chile, Colombia, Uruguay, and South Africa currently use carbon taxes.