Carbon Pricing Explained: Tax, Credits & Offsets

Climate change has become a buzzword in the contemporary context where there is increasing pressure to combat climate change. Governments across the world are no longer talking about it but are shifting to more tangible tools that can turn carbon pollution into a commercial commodity of sorts. Climate policy is now dominated by carbon pricing systems that include taxes, credits, and offsets to encourage green investment and increase revenue and direct market behavior. A well-structured carbon mechanism may turn out to be a key to sustainable change in ocean related sectors like shipping, offshore energy and maritime logistics.

Carbon Tax vs. Carbon Credit vs. Offset — Demystifying the Mechanisms

Carbon pricing is at the most fundamental level, a matter of charging the environmental harm caused by the greenhouse gas emissions. But the term includes different instruments:

• A carbon tax refers to a government charge on the amount of carbon present in the fuels or emissions, which offers a predictable price per tons of carbon dioxide equivalent (CO 2e ). It gives incentives to emitters to cut down on pollution or compensate the emissions. Carbon taxes are comparatively easy to execute and the price is certain.¹
• Carbon credits (also known as allowances) are government issued permits that allow the holder to emit a certain quantity of CO 2e. They are usually applied to the cap and trade systems, when the overall volume of allowed emissions is limited and the permits are exchanged in a controlled market.²
• Carbon offsets are the credits of emission that have taken place in other locations, e.g. reforestation or renewable energy initiatives. These can be bought by companies or governments to offset their own emissions. Although carbon credit is synonymous with the voluntary market, in compliance systems, their application differs depending on jurisdiction.³

These tools combined form a pricing ecosystem, which will lead to reduction of emissions and provide economic signals to invest. They vary in their implementation but have a common objective, which is the reward for the reduced emissions and on the other hand, fines for carbon related pollution activities.

How Carbon Tax Credits Incentivize Green Investment

The only difference between carbon pricing and taxation is that it can be directly capitalized into clean technologies and clean practices. Policymakers change the economics of industries and investors by placing a price on carbon. Emission reduction projects such as energy efficiency and electrification, or next generation fuels, will be more cost-competitive compared to high-carbon options.

The revenues of carbon tax can be used to recycle green spending, rebates, or tax cuts, which increases their effects. Carbon tax revenues are also spent in most jurisdictions on decarbonization measures, energy transition efforts and to assist the impacted industries, further consolidating the road to a low carbon economy.⁴

In addition to direct taxes, carbon credits may be sold via government programs (e.g. ACCU units in Australia), or voluntary markets, and this provides new revenue streams to projects which provide real emissions reductions. This scheme is a good way to monetise the environmental performance by converting the emissions reductions to economic assets that can be bought or retired by firms to demonstrate compliance or fulfill voluntary climate commitments.

Integration with Maritime, Shipping, and Energy Industries

Historically carbon pricing has been applied to fix emissions sources such as power plants and heavy industry and meantime the application to ocean connected sectors were speeding up.

Shipping industry accounts for approximately 3% of the world greenhouse gas emissions, is getting under the radar of pricing instruments. Frameworks of emissions pricing have been floated by the International Maritime Organization (IMO) including a proposal of a 100/ton CO 2e levy under a Global Emissions Pricing Mechanism to be used in 2028, but the future of the initiative remains the subject of political negotiation.

The offshore and maritime energy sectors are also starting to react to the price of carbon. The carbon costs affect the fuel selection (e.g. low carbon fuels such as ammonia or hydrogen blends), ship design and logistics optimization that minimizes the voyage emissions. Carbon pricing improves the investment case in offshore wind and marine renewables, by changing relative returns towards the most effective infrastructure with lower emissions.⁵

Policy Comparison: EU ETS, Canada, Singapore, and Australia

European Union -Emission trading system (EU ETS):

The most developed cap and trade plan in the world is the EU ETS which includes power, manufacturing and aviation in Europe. The operators will be required to forfeit allowances on every tons of CO 2e released, and the cap will narrow as time goes by to meet the 2030 and 2050 EU climate targets.

Canada:

The carbon pricing in Canada is a combination of the federal fuel based carbon tax and the output based pricing systems and provincial cap and trade systems. Provinces demonstrate flexibility to design systems in compliance with national standards. The emissions cut and innovation activities are mostly funded by revenues, but recent changes in politics are now causing a discussion on the future of federal carbon pricing.⁶

Singapore:

The carbon tax has been in operation since 2019 in Singapore, was initiated at S$5 per ton (2019-2023) and is being planned to raise up to  S$25-80 per ton by 2030 to achieve net zero. It covers the industrial plants that have an important level of emissions and enables firms to offset a small part of the taxable emissions with high quality international carbon credits, combining both direct taxation and market mechanisms.⁷

Australia:

The carbon pricing environment in Australia has developed based on the carbon pricing schemes. Australian Carbon Credit Unit (ACCU) Scheme issues credits on emissions reduction or sequestration projects which can be traded or sold to meet the Safeguard Mechanism or to meet the voluntary buyers. New reforms have been made to reinforce the crediting framework.⁸

The Potential for “Blue Carbon Tax Credits”

With ongoing measures of governments perfecting carbon pricing, a new frontier is emerging, that is blue carbon tax credits: carbon credits based on marine and coastal carbon sequestration (e.g., mangroves, seagrasses, salt marshes). These natural systems are very effective in capturing and storing carbon as well as providing ecological co benefits. Even though at an early stage, blue carbon frameworks incorporated in national carbon pricing frameworks have the potential to open up capital flows to the restoration of coastal ecosystems and biodiversity safeguarding along with climate resilience.

Under ETS or carbon tax regimes, controlled parties could use permanent and verifiable blue carbon credits to offset their liabilities, and in effect commercialize ocean linked climate action and bring maritime focused industries into line with wider climate objectives.

Conclusion

Carbon taxes and credits are not mere policy instruments anymore; they are the forces that influence the investment flows and industrial policy. With a price on emissions, governments will be able to transform liabilities into assets, drive innovation, and direct capital into a sustainable future. These instruments can reconcile climate goals with economic development coupled with ambitious targets, while paving low carbon revolution in sectors such as shipping to energy.

1. homaio.com: https://www.homaio.com/post/what-is-the-difference-between-carbon-taxes-and-emissions-trading-schemes ↩︎
2. youmatter.world: https://youmatter.world/en/definition/definitions-carbon-price-carbon-credit/ ↩︎
3. carboncredits.com: https://carboncredits.com/the-ultimate-guide-to-understanding-carbon-credits/ ↩︎
4. oecd.org: https://www.oecd.org/content/dam/oecd/en/publications/reports/2019/06/the-use-of-revenues-from-carbon-pricing_f0fcd296/3cb265e4-en.pdf ↩︎
5. forourclimate.org: https://forourclimate.org/insights/50 ↩︎
6. reuters.com: https://www.reuters.com/markets/carbon/canadian-opposition-oil-ceos-call-scrapping-federal-carbon-price-system-2025-03-21/ ↩︎
7. nccs.gov.sg: https://www.nccs.gov.sg/singapores-climate-action/mitigation-efforts/carbontax/ ↩︎
8. cer.gov.au: https://cer.gov.au/schemes/australian-carbon-credit-unit-scheme ↩︎