A new book by leading climate economists has challenged widespread misconceptions about carbon pricing, describing it as a powerful and flexible tool for tackling climate change when properly designed and supported by strong government action.
Authored by Potsdam Institute for Climate Impact Research (PIK) Director Ottmar Edenhofer alongside political scientist Cecilia Kilimann and economist Christopher Leisinger, the publication seeks to bridge ideological divides over one of the most debated elements of climate policy.
- World leaders must empower Africa for Climate Action – UNFCCC
- Nigeria to raise N500bn green bond to tackle climate change in 2026
“Gradually increasing the price of fossil fuels is considered a key element of effective climate policy – and yet it remains the subject of bitter controversy,” Edenhofer said. “We want to build bridges between the camps.”
According to the authors, critics who equate carbon pricing with blind faith in free markets or the abandonment of regulation are mistaken. Instead, they argue that carbon pricing only works efficiently when backed by comprehensive government capacity and complementary policies such as standards, bans and subsidies.
Drawing from recent peer-reviewed research, including studies by PIK and the Mercator Research Institute on Global Commons and Climate Change (MCC), the book presents an accessible analysis aimed at both professionals and general readers. It dismantles five common misconceptions surrounding carbon pricing.
No Steering Effect?
One of the most common arguments against carbon pricing is that rising fuel costs have not significantly reduced driving, leading some to question its impact. However, the authors contend that such observations highlight the need for complementary measures rather than proving failure.
They explain that putting a price on environmental damage gradually pushes high-emission technologies like coal-fired power plants out of the market while encouraging cleaner alternatives. When well designed, they add, carbon pricing can align economic incentives with ethical motivations for climate protection.
Politically Unfeasible?
Contrary to claims that carbon pricing cannot gain political traction, the authors point to growing global adoption. Currently, 28 percent of global CO₂ emissions are directly priced. In the European Union, this share is expected to rise to 75 percent by 2028 with the launch of a second emissions trading system covering transport and buildings.
The book notes that countries—including major emerging economies—are increasingly embracing carbon pricing because of its flexibility. It can be structured as a tax, an emissions trading system, or a hybrid model tailored to national circumstances.
Socially Unjust?
The authors acknowledge that carbon pricing can disproportionately affect low-income households if implemented without safeguards. However, they argue that other climate measures such as bans and standards can also impose hidden costs.
Unlike those measures, carbon pricing generates revenue that can be redistributed. The book outlines four compensation mechanisms: per capita climate dividends, targeted “climate money” for buildings, reductions in electricity costs, and hardship payments for vulnerable groups.
An Obsolete Model?
Some critics question the relevance of carbon pricing in a future climate-neutral world. The authors counter that carbon pricing will remain vital even after net-zero is achieved.
They highlight the importance of atmospheric carbon removals to offset unavoidable residual emissions. In the long term, pricing mechanisms could help manage supply and demand for both emissions and removals, finance clean technologies, and even enable net negative emissions if global warming temporarily exceeds 1.5°C.
Only Viable with a World Government?
Another misconception is that carbon pricing requires global coordination to work. While a uniform global carbon price may not be realistic or necessary, the book argues that regionally fragmented systems can still drive meaningful progress.
It also addresses concerns about industrial competitiveness and job losses, outlining mechanisms to prevent “carbon leakage” when production shifts to countries with weaker climate policies. These mechanisms, the authors suggest, could foster deeper international cooperation.
With the European Union’s climate tariff system set to take effect in 2026, carbon pricing is expected to gain even greater global relevance.
“In times of increasing geopolitical tensions, this will also become relevant to security policy,” Edenhofer said, noting that reduced dependence on fossil fuels could weaken the oil and gas revenues of authoritarian states.
“The career of carbon pricing has only just begun,” he added. “This book explains why that is a good thing.”
