Carbon pricing as a policy tool for lowering global warming emissions uses market mechanisms that can be in form of a fee on emitting or financial incentives to lower emissions. The created price signal shifts consumption and investment patterns, making economic development compatible with climate protection.

To address climate change, carbon pricing combines different instruments and approaches – fixed price assigned to carbon emissions (‘price-based) or emission limitations to a specific level (‘quantity-based). Carbon pricing can be explicit, as in set by external factors such as taxes, emission trading, or offset prices, or implicit and regulated through tailored internal approaches, such as in the cases of inter-company emission trading or internal shadow carbon pricing.

The report on Carbon Pricing possibilities in Armenia developed by the EU4Climate in November 2022, assesses carbon pricing possibilities, the potential, readiness and needs of Armenia with regard to the possible use of carbon pricing and identifies, assesses and proposes appropriate carbon pricing options for Armenia in the light of the domestic as well as regional and international context.

The suggested options for carbon pricing in Armenia are based on the national circumstances, country targets and abatement opportunities. The selection of the carbon pricing mechanism is based on mitigation potential, mitigation measures to access such potential, suitability of the carbon pricing mechanism to the mitigation measures, national priorities, and, last but not least, the capacity to implement the mechanism.

As far as carbon taxes typically cover direct emissions from the targeted sectors or subsectors and given Armenia’s economy-wide NDC, its climate policy has to apply a holistic approach encompassing overall emissions, particularly in key sectors and among key emission sources. Armenia’s GHG emissions come primarily from the energy sector, accounting for 66.7% of Armenia’s total GHG emissions. More specifically, electricity and heat generation represent the largest greenhouse gas mitigation potential. Transport is the second largest emitter largely reliant on fossil fuel. Both of these sectors are well-suitable for carbon pricing.

Taking into consideration the size of Armenia’s economy, and the readiness of its institutions and businesses, the selection of carbon tax (with a possible combination with domestic offsets scheme) is recommended, given the small number of potential installations, the possible difficulty in ensuring liquidity and lack of existing exchange-based trading for linked energy commodities.

In regard to the commitments or existence of promising regional markets, Armenia needs to consider primarily the obligations and possibilities relating to the European carbon market, European Union Emissions Trading Scheme (EU ETS) – the first major carbon market in the world and EU’s key tool for reducing greenhouse gas emissions cost-effectively.

Carbon trading or CO2-based carbon taxation and offsets would become possible with the introduction of installation-level Measurement, Reporting and Verification (MRV), a requirement according to the Comprehensive and Enhanced Partnership Agreement between the European Union and Armenia (CEPA. It could be also used as a tracking tool for the implementation of climate policies and measures, as well as prepare the country for the implementation of the European Carbon Border Adjustment Tax – placement of the carbon price on certain imports into the EU from third countries.