Policy

The World Council of Environmental and Resource Economists Associations – WCEREA hosted a policy webinar on “The political economy of carbon pricing” on September 9, 2025. Moderated by Marcelo Caffera (University of Montevideo and WCEREA Board member), it featured contributions from Bård Harstad (Stanford Graduate School of Business), Jeroen van den Bergh (Vrije Universiteit Amsterdam), and Catherine Wolfram (MIT Sloan School of Management).

Carbon pricing is widely regarded as a cornerstone of climate policy, yet current levels remain far below what is needed to achieve the Paris Agreement targets. The webinar explored why progress has been slow and how international trade, treaties, and public opinion could help raise ambition.

Catherine Wolfram highlighted the role of the EU Carbon Border Adjustment Mechanism (CBAM) in reshaping incentives. By charging imports at the border, CBAM reduces the benefits of free-riding and encourages partners such as Brazil and China to develop their own carbon markets. She noted that lower-income countries with cleaner electricity systems may also benefit in such a framework. Wolfram referred to her forthcoming report Building a Climate Coalition: Aligning Carbon Pricing, Trade and Development, which outlines how coordination in heavy industries could advance global carbon pricing.

Bård Harstad underlined that carbon pricing not only reduces emissions but also stimulates innovation and renewable energy through spillover effects. He pointed to political economy challenges such as lobbying, protection of connected firms, and policy reversals after elections, which weaken commitments. International treaties can make future deviation more costly, increasing the credibility of carbon pricing. Harstad also stressed the potential of trade policy, showing how tariff functions and contingent trade agreements can provide incentives for countries to adopt and maintain stronger policies.

Jeroen van den Bergh focused on public support for carbon pricing, stressing that acceptance evolves over time. Citizens’ perceptions are influenced by how policies are framed, the narratives surrounding them, and their interaction with other measures. He identified opportunities to broaden the arguments for carbon pricing, combine it with complementary policies, and build feedback loops between public opinion and implemented measures.

The discussion concluded that high carbon prices are unlikely to be politically viable if pursued in isolation. Instead, carbon pricing should be part of a broader mix that includes complementary domestic measures, international coordination, and trade-based mechanisms, offering a more effective path toward ambitious and durable climate action.

Report by Antonia Pacelli, EAERE Communication Support Team.

Watch the video recording on the WCEREA YouTube channel.

Access the panelists’ slides:

• Wolfram’s presentation
• Harstad’s presentation
• van den Bergh’s presentation

Reflections from the EAERE POC – LIFE COASE Net Zero Carbon Market Policy Dialogue on May 7

Environmental economists have long argued for integrating carbon markets to maximize environmental benefits. In practice, the number of Emissions Trading Systems (ETSs) has grown to 38 systems worldwide, but their integration has progressed slowly over the past years. At the same time, new opportunities for carbon market integration in the context of the UNFCCC and the Voluntary Carbon Market (VCM) are becoming increasingly tangible. Contributing to a better understanding of the obstacles and new prospects for carbon market integration was the aim of the EAERE POC – Life Coase Policy Dialogue on ‘Advancing carbon market integration under Article 6’, which took place on May 7, 2025 during the EUI Climate Week 2025.

The policy dialogue was moderated by the EAERE President Simone Borghesi (EUI, University of Siena), including a presentation by Baran Doda (adelphi), and a panel discussion with Nataliya Kushko (ERCST), Mette Quinn (European Commission), Xiliang Zhang (Tsinghua University) and José Pedro Bastos Neves (Ministry of Finance, Brazil). The event was concluded by the EAERE POC Chairperson Jos Delbeke (EUI).

The Current Carbon Market Landscape: Growth and Fragmentation

As of 2025, ETSs cover about 19% of global greenhouse gas (GHG) emissions. While established systems like the EU ETS, China National ETS, and UK ETS continue to evolve, new systems are also emerging. Currently, there are 20 systems under development or under consideration globally in places like Brazil, India, Türkiye, and Japan.

Despite this growth, significant fragmentation exists which limits the prospects of carbon market integration. While some linkages between compliance markets already operate smoothly, such as those in the states of the Regional Greenhouse Gas Initiative (RGGI), between Tokyo and Saitama, California and Québec, and the EU and Switzerland, broader integration faces considerable hurdles.

Key Obstacles to Linking Markets

The discussion highlighted several critical barriers to linking different ETSs. First, more and more ETSs are adopting intensity-based caps rather than absolute caps. Intensity-based caps provide compliance entities with flexibility and can support ambitious targets provided the intensity benchmarks are set sufficiently stringent, and the design of the ETS and other climate policies in the jurisdiction are well coordinated. However, they introduce greater uncertainty compared to absolute caps. Notably, the EU ETS is legally restricted to linking only with systems that have absolute emissions caps. This difference in approach makes linking more challenging.

Second, the use of offset credits varies widely across ETSs, from being completely banned to being allowed for a significant portion of compliance obligations. The variety of crediting mechanisms and the resulting differences in credit types and quality add further complexity. This fragmentation poses a significant challenge, as systems are more likely to link if they share similar designs.

Lastly, each ETS reflects its national context and interests, resulting in different policy designs. In addition, political obstacles, including climate-skeptic governments and geopolitical factors, can delay international cooperation on carbon pricing. Linking requires common rules and economic conditions, as well as trust, which are not always present.

Promising Developments under Article 6

Despite the challenges in direct linking, new opportunities for cooperation are emerging, particularly through Article 6 of the Paris Agreement. Agreements reached at COP29 in 2024 substantially advanced the market mechanisms under Article 6.2 and Article 6.4. However, critical issues remain unresolved, such as ensuring transparency and environmental integrity of the mechanisms. Capacity-building needs in developing countries are also a key issue.

The latter issue was also picked up in the discussion, which highlighted the unique challenges faced by developing countries establishing carbon markets. The right decisions on cap setting, carbon credits and linking depend on the national context. The panel speakers emphasized the need for better exchange between the Global North and Global South and more careful analysis of impacts of carbon pricing on society and economic growth in developing countries. Multilateral cooperation and clear international regulation were seen as necessary preconditions for continued carbon market development.

Looking ahead, while direct linking of ETSs is complex, particularly across systems with very different designs, the dialogue suggested that indirect linking via Article 6 mechanisms and the VCM might be a more promising avenue. A “coalition of the willing” composed of parties with common ambition and principles could also help drive progress.

Find out more in the Policy Brief State-of-play in international carbon markets 2025.

Watch the interviews with Mette Quin and Baran Doda.

Following discussions and commitments at G7, G20, UN-FCCC and UN-CBD, the heads of the IMF, OECD, World Bank and WTO have announced on 25 May 2023 the launch of a Joint Subsidy Platform (JSP) at www.subsidydata.org to enhance transparency on the use of subsidies. The JSP is intended to facilitate access to information on the nature, size, and economic impact of subsidies, with a view to facilitating dialogue on their appropriate use and design. The initiative should help research, analysis and policies on EHS (Environmentally Harmful Subsidies), including FFS (Fossil Fuel Subsidies) and BHS (Biodiversity Harmful Subsidies). More information here.