CO2 pricing: a measure to reduce emissions

03 June 2022

What makes the carbon price relevant for companies and why should they consider it?

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Why Carbon Pricing Is Reshaping Business and Product Costs

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Carbon pricing follows the "polluter pays" principle by assigning a financial cost to greenhouse gas emissions. Instead of society bearing the costs of climate change alone, businesses that generate emissions increasingly face carbon-related costs through mechanisms such as emissions trading systems and carbon taxes.

As carbon prices rise, carbon-intensive products and production processes become more expensive, while low-carbon alternatives gain a competitive advantage. This creates a strong economic incentive for companies to reduce emissions, improve energy efficiency, and invest in low-carbon materials and technologies.

The EU Emissions Trading System (EU ETS) remains the world's largest carbon market, but carbon prices have evolved differently than expected. While prices approached €100 per tonne in 2023, they have since stabilized at lower levels due to changing market conditions and proposed reforms to the EU ETS. In mid-2026, EU carbon allowances traded at around €80 per tonne of CO₂, while the first official CBAM certificate prices for 2026 were published at approximately €75 per tonne for both the first and second quarters.

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How the EU Emissions Trading System (EU ETS) Works

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The EU Emissions Trading System (EU ETS) has been in place since 2005 and remains the European Union's primary market-based instrument for reducing greenhouse gas emissions. Originally introduced to help meet the targets of the Kyoto Protocol, the system has since become a cornerstone of the EU's climate strategy for achieving climate neutrality.

The EU ETS sets an overall cap on the amount of greenhouse gases that can be emitted by covered sectors. Companies in power generation, energy-intensive industries, aviation, and since 2024 also maritime transport, must surrender EU Emission Allowances (EUAs) for their emissions. These allowances can be bought and sold, creating a carbon market where the price of emissions is determined by supply and demand.

Over time, the overall emissions cap is reduced, meaning fewer allowances are available each year. This gradually increases the incentive for companies to invest in energy efficiency, cleaner technologies, and lower-carbon production processes in order to reduce both emissions and compliance costs.

The Expansion of Carbon Pricing in Europe

The EU has continued to expand carbon pricing beyond traditional industrial sectors. In 2027, a separate emissions trading system, known as EU ETS 2, is scheduled to cover emissions from buildings, road transport, and additional fuel sectors. This new system is designed to complement the existing EU ETS and further support the EU's climate objectives.

As carbon pricing expands and emission allowances become more limited, companies across more sectors are facing increasing financial incentives to reduce their greenhouse gas emissions. Reliable carbon data, Product Carbon Footprints (PCFs), and effective emissions management are therefore becoming increasingly important—not only for regulatory compliance but also for maintaining long-term competitiveness.

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What is the difference between CO2 price and CO2 tax?

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In Germany, the introduction of carbon pricing in the heating and transport sectors has led to additional direct costs. So, what is the difference between the CO₂ price and a CO₂ tax?

Compared with the EU ETS, a CO₂ tax sets a fixed price per tonne of greenhouse gases emitted, meaning that the total quantity of emissions is influenced only indirectly. A CO₂ tax therefore applies, for example, to the purchase of fuels or other CO₂-intensive materials.

To achieve its emissions-reduction targets, Germany aims to accelerate the transition to alternative energy sources and promote the shift toward electromobility. The German government has set the goal of registering seven to ten million electric vehicles in Germany by the end of 2030. This could significantly reduce the emissions generated during vehicle use within the country.

However, the production of electric vehicles can still generate substantial greenhouse gas emissions. In particular, the extraction and processing of the materials required for batteries and other vehicle components can have a considerable carbon footprint. These upstream emissions may reduce part of the climate benefit achieved during the use phase.

Although electric vehicles are produced for the European market, many of the necessary raw materials are sourced abroad. As a result, part of the associated CO₂e emissions is generated outside Europe, effectively shifting a share of the environmental impact to the countries where extraction and processing take place.

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The risk of carbon leakage

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The problem explained above is closely related to so-called carbon leakage. Carbon leakage occurs when companies relocate production to countries with less stringent emissions regulations in order to reduce climate-policy-related costs. This can lead to an increase in their overall greenhouse gas emissions. The risk of carbon leakage is particularly high in certain energy-intensive industries. To address this risk, the EU regularly updates its climate legislation.

The EU and the German government have set ambitious climate targets and introduced active climate measures such as CO₂ pricing, CO₂ taxes, and policies to combat carbon leakage. These measures increase the pressure on companies to act quickly and reduce their CO₂ emissions. For this reason, they are relevant to every company.

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How sustamize Helps Companies Prepare for Carbon Pricing

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As carbon pricing expands and climate regulations become more comprehensive, companies need more than corporate-level emissions reporting, they need accurate product-level carbon data. Understanding the Product Carbon Footprint (PCF) of materials and products enables businesses to identify emission hotspots, evaluate lower-carbon alternatives, and make informed procurement and product design decisions before carbon costs increase further.

With the sustamizer, companies gain access to a comprehensive CO₂e database and a science-based calculation methodology aligned with the GHG Protocol and ISO 14067. This enables manufacturers to calculate Product Carbon Footprints, improve Scope 3 transparency, compare materials and suppliers, and proactively reduce emissions while preparing for evolving regulations such as the EU ETS, CBAM, and future sustainability reporting requirements.

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