Shell and Carbon Pricing
There is no single solution to the urgent societal challenge of cutting carbon emissions to help limit global temperature rise. Shell advocates for governments to use carbon pricing as one mechanism to tackle climate change. Find out more about how carbon pricing works and how Shell is supporting the development of carbon markets.
What is carbon pricing and how does it work?
According to the World Bank, a carbon price gives an economic signal and emitters decide whether to discontinue their polluting activity, reduce emissions, or continue emitting and pay for it. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society. The carbon price also stimulates clean technology and market innovation, fueling new, low-carbon drivers of economic growth.
What are the different types of carbon pricing instruments?
According to the World Bank, there are two main types of explicit carbon pricing: emissions trading systems (ETS) and carbon taxes.
An ETS 鈥 sometimes referred to as a cap-and-trade system 鈥 caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget.
A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or 鈥 more commonly 鈥 on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.
There are also implicit carbon pricing signals 鈥 such as performance standards, flare reductions/penalties, and carbon takeback obligations 鈥 which do not have an explicit price on carbon but do encourage carbon reduction through other policy mechanisms.
How does a carbon tax work?
1. Government imposes a tax on emitters for their GHG emissions.
2. This gives emitters a financial incentive to reduce emissions.
3. The carbon tax encourages emitters to pursue energy efficiency improvements.
How does an emissions trading system work?
1. The government places a limit on the amount of GHG emissions for sectors and issues units that emitters can use to meet their compliance obligations.
2. Emission units can be traded between emitters.
3. Emitters are required to obtain enough units to cover their emissions.
4. The carbon price is determined by supply and demand for emission units.
Did you know?
Emissions trading schemes are also called "cap-and-trade鈥
Our position on carbon pricing
Shell advocates putting a direct price on carbon emissions, as part of a broader policy framework to achieve net-zero emissions. Our view is that the carbon price, whether through cap-and-trade, carbon tax or a hybrid system, should apply to as many sectors of the economy as possible and increase over time.
Policies should be based on robust and transparent modelling of the impacts of carbon pricing on consumers and industry.
Shell also promotes greater international cooperation through systems that transfer carbon credits between countries and advocates to ensure that international carbon credit transactions have environmental integrity by avoiding double counting across national inventories, including in voluntary carbon markets.
To find out more about our global climate and energy transition policy principles and how carbon pricing fits within that, please refer to our advocacy page. For more information, please refer to a podcast on carbon pricing.
Carbon pricing initiatives in which Shell is active
Shell is one of the largest global participants in carbon markets. We have been active since 2003, when the first emissions trading scheme was set up in Europe. Since then, we have expanded significantly to become a global presence in both the regulated and voluntary carbon markets.
Today, we participate in all major emissions trading schemes in the world. We work with many companies across the globe, helping them to comply with environmental regulations and manage their exposure to the carbon markets. Shell has set several milestones in the emissions market history, including being the first company to:
- Execute a trade of European Union Allowances
- Trade US federal CO2 compliance future contract on the Chicago Climate Future Exchange
- Trade a carbon product usable under a mandatory US cap-and-trade program
- Take delivery of Certified Emission Reductions (CERs) under the United Nations Clean Development Mechanism program
For further information, please visit Shell Environmental Products.
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Page last updated: March 25, 2025
