Turning cost of carbon into a catalyst for change
Driving decarbonization with carbon pricing
Implement CO₂ pricing mechanisms to level the playing field for low-emission solutions and guide capital toward climate-aligned investments.
While carbon pricing is gaining ground globally, its scope, consistency, and price signals remain uneven – limiting its effectiveness as a transition tool. Strengthening these mechanisms and using revenues wisely can drive decarbonization, improve investment certainty, and support vulnerable groups through the shift.
Criticality of the topic
Carbon pricing is a cornerstone of efficient and technology-neutral decarbonization. By putting a price on emissions, it internalizes environmental costs and sends a clear financial signal to producers, consumers, and investors. Well-designed CO₂ pricing mechanisms incentivise cleaner choices, shift capital toward low-carbon technologies, and strengthen the competitiveness of climate-friendly solutions.
They also generate public revenues that can be reinvested into the transition or used to mitigate social impacts. Without carbon pricing, polluters face limited financial accountability, making it harder for zero-emission alternatives to compete and for governments to meet emissions targets in a cost-effective and equitable way.
Latest developments
Carbon pricing continues to expand, with the EU strengthening its Emissions Trading System (EU ETS) by tightening caps and launching a parallel ETS2 for buildings, road transport and additional sectors. To address carbon leakage, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), marking a major policy shift.
Globally, over 70 jurisdictions now apply some form of carbon pricing, covering around 23% of GHG emissions. However, schemes differ widely in scope, design, and price levels, limiting their overall effectiveness. Price volatility, such as EU ETS carbon prices ranging from over €100 to below €70/tCO₂ in 2023, remains a concern for long-term investment planning.The use of carbon pricing revenues is also evolving. Countries like Germany increasingly direct funds toward climate investment, innovation support, or targeted social compensation. Meanwhile, more than 2,000 companies worldwide have adopted internal carbon pricing, using it as a tool to guide investment, assess risk, and prepare for rising regulatory costs.
Trends and outlook
Carbon pricing is expected to expand into new sectors such as maritime, aviation, and industrial heat, while efforts to link and harmonize systems across regions will intensify. Greater price stability and predictability will be essential to de-risk capital-intensive
decarbonization investments and mobilize private finance. Policymakers will also face growing pressure to address the social impacts of carbon cost pass-through, particularly for low-income households and small and medium-sized enterprises. Future schemes are likely to combine stronger price signals with targeted compensation and clearer long-term trajectories, making carbon pricing a more central and equitable pillar of national transition strategies.
Governments and other policymakers
Governments should implement or strengthen carbon pricing instruments, such as emissions trading systems or carbon, with transparent, long-term trajectories to guide investment decisions and reduce uncertainty. Coverage must be broadened across sectors while closing loopholes like free allocations or exemptions that weaken the carbon signal.
Revenues from CO₂ pricing should be used strategically to support zero-emission technologies, modernize energy infrastructure, improve efficiency, and protect vulnerable groups through targeted compensation. International coordination is also essential to align pricing regimes and prevent carbon leakage, whether through mechanisms like the EU CBAM or future cross-border agreements.
and industrial heat.
Companies and industrial players
Companies should integrate carbon cost exposure into capital planning, product pricing, and long-term portfolio strategy. Implementing internal carbon pricing can help assess project competitiveness, manage regulatory risks, and prepare for stricter compliance regimes. Participation in voluntary carbon markets or Article 6 mechanisms under the Paris Agreement could help manage residual emissions, but only where high integrity can be ensured.
Firms should prioritize technical, permanent removals over nature-based offsets to maintain credibility. Crucially, any credits used must be robustly accounted for and transparently reflected in the company’s emissions balance; without clear pricing and credible claims, carbon markets will not deliver real mitigation. Companies should also engage in policy design to help shape predictable, transparent, and market-based CO₂ pricing systems that support investment certainty and fair competition across sectors and regions.
Investors
Investors should incorporate carbon pricing scenarios into asset valuation, risk modelling, and portfolio alignment strategies. Evaluating the readiness of investee companies for rising CO₂ prices, and encouraging them to adopt internal carbon pricing, can help future-proof investments. Capital should be channelled into technologies and assets that stand to gain from stronger carbon price signals, including renewables, electrification, and carbon capture solutions. As part of ESG stewardship, investors should advocate for stable, transparent pricing frameworks that enable long-term planning and reduce policy uncertainty across sectors.
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