(September 18, 2025)--Based on the principle that emitters should pay for the damage caused by greenhouse gas (GHG) emissions, carbon pricing is critical for decarbonization in Asia, which accounts for over 50% of annual global emissions. According to a new Institute for Energy Economics and Financial Analysis (IEEFA) report, several Asian countries have established carbon taxes and emissions trading systems (ETSs), but current pricing levels remain insufficient to meet international climate commitments.
“Current carbon pricing mechanisms in the region remain below USD20 per tonne of carbon dioxide equivalent (tCO2e), falling short of the USD50–USD100/tCO2e needed to align by 2030 with Paris Agreement targets,” says Ramnath N. Iyer, the report’s co-author and Sustainable Finance Lead for IEEFA Asia.
Together with IEEFA’s Asia Sustainable Finance Analyst, Shu Xuan Tan, Iyer examines carbon pricing mechanisms in Asia and recommends that regional policymakers should strategically plan to implement ambitious carbon pricing mechanisms in a phased manner.
Regional context and challenges
According to the authors, there are three primary approaches to carbon pricing: carbon taxes, which impose a fixed price per unit of GHG emitted; ETSs, which establish a cap on total emissions and allow entities to buy and sell emission allowances; and carbon crediting mechanisms, which generate tradable credits for verified emission reductions from projects or activities outside capped sectors.
The oversupply of emissions allowances, stemming from overly generous free allocations, hinders the effectiveness of Asia's carbon markets.
Carbon prices remain low due to allocations favoring fossil fuel-intensive firms, limited sectoral coverage, weak targets (based on intensity rather than actual emissions), and persistent fossil fuel subsidies.
“In the initial phases of their ETS implementation, countries like China and South Korea have generously allocated free allowances, leading to a market surplus and reduced prices. This contrasts with the European Union (EU), which has increasingly moved towards auctioning more than 50% of its allowances,” notes Tan.
Another challenge is the limited sectoral coverage of these schemes. Most carbon pricing systems concentrate on the power sector, leaving significant emissions from buildings, agriculture, and transportation largely unpriced. China is broadening its ETS to include heavy industry, and South Korea's system covers over 70% of national emissions. However, a comprehensive, economy-wide application is still absent.
Additionally, many systems set unambitious targets. For example, China's national ETS uses an intensity-based cap, limiting emissions per output unit, rather than setting an absolute cap on total emissions. This design increases total emissions as the economy grows, is less effective, and more costly than the absolute caps utilized by the EU and South Korea.
Pervasive fossil fuel subsidies, which actively work against carbon price signals, compound the problem. In 2022, these subsidies amounted to USD1.25 trillion globally. The East Asia and Pacific regions had the largest subsidy share, undermining the urgency to decarbonize.
Marginal abatement costs can determine carbon prices
Determining the appropriate carbon prices for Asian economies requires evaluating the costs of shifting from high- to low-carbon technologies. Marginal abatement costs (MACs) are a potential assessment method. These costs vary significantly across sectors and decarbonization activities, reflecting differing technological maturity, capital intensity, and low-carbon alternative viability.
For low-cost abatement opportunities, particularly in power generation (such as coal-to-renewables switching), a carbon price of between USD10/tCO₂e and USD30/tCO₂e is likely to be effective, since renewable sources are broadly competitive with fossil fuels for new generation.
However, higher-cost sectors necessitate significantly elevated pricing. For example, replacing Europe's internal combustion engine vehicles with electric vehicles would require carbon prices of approximately EUR407/tCO₂e, while decarbonized heat pump installations need prices between EUR87–EUR93/tCO₂e.
Abating emissions in steelmaking would require carbon prices ranging from USD144/tCO2e in the United States to USD105/tCO2e in India and USD83/tCO2e in China. Decarbonized ethylene production would require prices above USD230/tCO₂e, while sustainable aviation fuel implementation ranges between USD252–USD550/tCO₂e.
“MACs can vary depending on factors such as location, emission intensity of the technology replaced, and period of replacement, among other considerations. Regardless of the particular MAC for any application, the existing carbon tax and ETS pricing regimes globally, and especially in Asia, are inadequate to address the challenge of rapid decarbonization,” explains Iyer.
Phased increases and ambitious targets
A robust financial structure linked to a carbon pricing system is essential to generate significant revenue from carbon permit sales. This depends on setting ambitious emission limits and allocating a substantial share of the permits through transparent bidding processes.
A pivotal factor in achieving successful auctions lies in integrating ETSs with electricity markets and the overall economy. When emission expenses are factored into manufacturing costs, the end products can be appropriately priced.
“A phased carbon price starting at USD15–USD25/tCO₂e, with predictable annual increases of USD10–USD15/tCO₂e, would give businesses and households time to adapt and eventually align with the International Monetary Fund’s recommended carbon price floor for emerging economies,” suggests Iyer.
The report’s authors also recommend phasing out fossil fuel subsidies and redirecting a substantial share of the savings to social and climate-related programs.
“Savings from eliminated fossil fuel subsidies can be redirected to fund climate projects and social safety nets, and offset energy costs for lower-income households, making carbon pricing progressive and reducing poverty and inequality,” adds Tan.
Preserving environmental integrity and economic stability is also possible by introducing safeguards to prevent the relocation of industrial activity to regions with less stringent climate rules.
