Higher CO2 prices trigger green investments, strengthen long-term productivity – analyses

Reliable and higher prices for carbon emissions are letting companies increase their climate friendly investments, and strengthen the economy’s productivity in the long run, according to two separate analyses by economic research institutes in Germany. 

“For many companies, the question of whether there is a reliable CO2 price level is decisive for their decision to invest in a new, climate friendly installation,” said Mathias Dolls, a researcher at the ifo institute. In a company survey experiment, respondents on average would only start investing if the price for emitting one tonne of CO2 constantly remained above 90 euros. In the survey, raising the expected price from 50 to 175 euros moves the average firm from rejecting the green investment to clearly favouring it. 

The average price for emissions certificates in the European emissions trading system (ETS) was 74 euros in 2025. “Prices currently are near the threshold that lets the average industrial company in Germany begin to invest in climate friendly solutions, but a large fraction is likely to hesitate still,” the institute concluded. “If prices fluctuate too much, they don’t invest,” researcher Dolls added. The carbon price could only take full effect if companies can expect certain price levels to prevail in the future. Otherwise, they retain their investments in the hope of lower prices even if prices are currently high, the survey among 830 industrial companies showed. “Reliable political framework conditions therefore are decisive for investment decisions,” the institute said. 

In a separate analysis, research institute DIW found that higher CO2 prices also boost employment in climate friendly industries, where workers often attain skills and expertise in green technologies that increase their productivity in the long run, in a future climate-neutral economy. “Despite tight budgets, it could make sense to finance the state more through CO2 taxes and less through income taxes,” as lower income taxes increase incentives to work more, the institute said. 

DIW modelled its analysis on US company data, but said its methodology would be applicable to other economies and pricing systems as well. “For the steering effect, it is important that there is a price on emissions, and not how it is designed in detail,” the institute said. “The concern that higher CO2 prices primarily are a burden to the economy is short-sighted,” said DIW researcher Sonja Dobkowitz. The learning processes triggered by higher emissions prices ultimately would increase output per worker, she said. 

Carbon pricing therefore could be equated to “an investment in higher future productivity” that simultaneously reduces emissions and helps keep state revenues constant, Dobkowitz argued. Policymakers around the world are hesitant to replace income taxes with carbon taxes, fearing that this will reduce total revenues. But the data had shown that the positive steering effects more than balance out the negative effects of a higher CO2 price on available incomes and the shift of labour to the still-less-productive green industry sector, she added. “A low CO2 price might seem convenient for short-term economic growth, but it comes at a cost,” Dobkowitz said. “It means letting go of part of the knowledge and productivity that will carry a climate neutral economy in the future.”