Cityscape transforming into a lush forest, symbolizing the shift from carbon-intensive economies to sustainable ones.

Can Carbon Pricing Save the Planet? Exploring the Impact of Climate Policies on CO2 Emissions

Elliot Brynn in Climate & Environment December 2025 • 5 min read.

"Dive into the latest research on carbon taxes, emissions trading, and climate policy stringency to see what works in cutting carbon emissions."

The relentless rise in global carbon dioxide (CO2) emissions continues to fuel global warming and climate change, posing significant threats to our planet. Standard climate change models predict a grim future if current policies remain unchanged, potentially leading to a 3°C increase in global temperatures above pre-industrial levels by the end of the century. Such a scenario could trigger catastrophic consequences, making it crucial to expand and enhance climate policies aimed at reducing CO2 and other greenhouse gas emissions.

To align with the Paris Agreement's ambitious goal of limiting global warming to 1.5°C above pre-industrial levels, anthropogenic CO2 emissions must decrease by approximately 45% from 2010 levels by 2030, achieving net-zero emissions around 2050. Similarly, capping warming at 2°C requires a 25% reduction from 2010 levels by 2030 and net-zero emissions by 2070. However, recent estimates indicate that the total global greenhouse gas emission level in 2030 is projected to be 16% higher than in 2010, underscoring the urgent need for effective climate action.

Carbon pricing emerges as a potent tool in this endeavor. By making low-carbon energy sources more competitive and incentivizing emissions reductions, higher carbon prices can curb the demand for carbon-intensive fuels. Strong governmental commitment to higher carbon prices can also stimulate investments in the development and expansion of low-carbon technologies. Yet, the overall effectiveness of these regulations remains a key question. This article delves into the effects of climate policies on CO2 emissions, providing an ex-post empirical analysis of carbon pricing's impact at the national level, based on a comprehensive database covering 121 countries.

Do Carbon Taxes and ETS Really Work? Unpacking the Data

Cityscape transforming into a lush forest, symbolizing the shift from carbon-intensive economies to sustainable ones.

The effectiveness of climate policies, such as carbon taxes and Emissions Trading Systems (ETS), has been a focal point of numerous studies. However, there is a surprisingly limited number of ex-post empirical analyses that examine how carbon pricing has actually influenced CO2 emissions. The majority of existing research focuses on Europe, often estimating emissions reductions within sectors covered by carbon pricing policies, with some extrapolating these findings to broader jurisdictional effects.

Recent research indicates that the aggregate reductions from carbon pricing on emissions are generally limited, typically ranging between 0% and 2% per year, with considerable variation across different sectors. Some studies suggest that carbon taxes perform better than ETS, with the European Union's ETS showing limited average annual reductions in carbon emissions, approximately 0% to 1.5%.

Carbon Taxes: Governments set a price on carbon emissions, allowing private entities to determine emissions reductions.
Cap-and-Trade ETS: Governments establish a limit on emissions, and allowances up to this limit are auctioned or allocated based on specific criteria. These permits are then traded, and carbon prices are determined by market supply and demand.
Baseline-and-Credit ETS: Baselines for emissions are set for regulated emitters. Emitters exceeding their baseline must surrender credits to offset the excess emissions, while those emitting below their baseline receive credits for these reductions, which they can sell to other emitters.

A recent study provides ex-post empirical analysis of the effects of carbon pricing on carbon emissions at the aggregate national level, using a broad sample of countries. It also explores the impact of broader climate policies, assessing the effects of an index of broad climate policies on CO2 emissions.

The Path Forward: Designing Effective Climate Policies

The research underscores the significance of well-designed climate policies in mitigating carbon emissions. The fact that higher carbon tax rates and prices of permits in ETS have reduced carbon emissions suggests that further increases in these and expansion to more countries, thus covering a greater share of global carbon emissions, are promising avenues to speed up the necessary transition towards much lower carbon emissions economies. Furthermore, the finding that more broadly, stringent climate policies have reduced carbon emissions, indicates that future enhancements in a wider range of climate policies can also be helpful for a speedy transition towards much lower carbon emissions, ideally to net-zero emissions.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2402.038,

Title: Effects Of Carbon Pricing And Other Climate Policies On Co2 Emissions

Subject: econ.gn q-fin.ec

Authors: Emanuel Kohlscheen, Richhild Moessner, Elod Takats

Published: 06-02-2024

Everything You Need To Know

How effective are carbon taxes and Emissions Trading Systems (ETS) in reducing CO2 emissions based on empirical data?

Empirical analyses suggest that the aggregate reductions from carbon pricing mechanisms like carbon taxes and Emissions Trading Systems (ETS) are generally limited, typically ranging between 0% and 2% per year, with considerable variation across different sectors. Some studies suggest that carbon taxes perform better than ETS. For example, the European Union's ETS has shown limited average annual reductions in carbon emissions, approximately 0% to 1.5%. These figures highlight the need for stronger and more widespread implementation to achieve substantial emissions reductions.

What are the key differences between Carbon Taxes, Cap-and-Trade ETS, and Baseline-and-Credit ETS?

Carbon Taxes involve governments setting a price on carbon emissions, allowing private entities to determine their emissions reductions. Cap-and-Trade ETS involve governments setting a limit on emissions, and allowances are auctioned or allocated. These permits are then traded, with carbon prices determined by market supply and demand. Baseline-and-Credit ETS establish baselines for emissions, and emitters exceeding their baseline must surrender credits, while those emitting below their baseline receive credits, which they can sell.

What are the projected global greenhouse gas emission levels in 2030 compared to 2010, and what does this imply for climate action?

Recent estimates indicate that the total global greenhouse gas emission level in 2030 is projected to be 16% higher than in 2010. This projection underscores the urgent need for effective climate action, as it deviates significantly from the reductions required to meet the Paris Agreement's goals of limiting global warming to 1.5°C or 2°C above pre-industrial levels. It highlights the necessity of implementing more stringent and widespread climate policies, including carbon pricing mechanisms and broader climate policy enhancements, to transition towards much lower carbon emissions.

How can increasing carbon tax rates and expanding Emissions Trading Systems (ETS) to more countries help in reducing carbon emissions?

Increasing carbon tax rates and expanding Emissions Trading Systems (ETS) to more countries can reduce carbon emissions by making low-carbon energy sources more competitive and incentivizing emissions reductions. Higher carbon prices can curb the demand for carbon-intensive fuels, stimulating investments in the development and expansion of low-carbon technologies. Expanding these policies to cover a greater share of global carbon emissions can accelerate the transition towards lower carbon emissions economies.

Besides carbon pricing, what other climate policies can be enhanced to speed up the transition towards net-zero emissions, and what are the implications of relying solely on carbon pricing?

In addition to carbon pricing mechanisms like carbon taxes and Emissions Trading Systems (ETS), broader and more stringent climate policies can help speed up the transition towards net-zero emissions. The finding that more broadly, stringent climate policies have reduced carbon emissions indicates that future enhancements in a wider range of climate policies can also be helpful for a speedy transition towards much lower carbon emissions, ideally to net-zero emissions. Relying solely on carbon pricing may not be sufficient, as it may not address all sectors and behaviors contributing to emissions. A comprehensive approach involving multiple policy instruments is crucial for achieving substantial and sustainable emissions reductions.