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.

In a new book, experts from the Potsdam Institute for Climate Impact Research (PIK) explain this concept and correct false perceptions. The publication is aimed at professionals and laypeople who want to gain a thorough understanding of the topic.

“We want to build bridges between the camps,” says PIK Director Ottmar Edenhofer, who co-authored the book with political scientist Cecilia Kilimann and economist Christopher Leisinger from his scientific staff.

“We address the objections of those who, like us, want strong climate policy, but equate carbon pricing with blind faith in the market and the abandonment of government regulation. The finding of climate economics is that this is a misunderstanding. For pricing to reduce CO₂ emissions efficiently and without collateral damage, comprehensive government capacities and accompanying measures are needed.”

The publication presents the latest research findings from renowned journals, including several highly acclaimed articles by PIK and the Mercator Research Institute on Global Commons and Climate Change (MCC), which has been part of PIK since the beginning of 2025. Presented in an easy-to-understand format, the book corrects five popular misconceptions about carbon pricing as a core instrument of climate policy:

Misconception 1

“No steering effect”. Fuel is becoming more and more expensive, yet people are not driving less – observations like this make many people doubt the efficacy of the carbon price. But the research team provides a different perspective: that this rather suggests a need for complementary measures such as bans, standards and subsidies – which are most effective in combination with carbon prices.

They explain simply but scientifically how pricing environmental damage pushes “dirty” products, such as coal-fired power plants, out of the market and promotes “clean” products. The analysis also looks at individual motivations: when well designed, market control is also well suited to ethically motivated climate protection.

Misconception 2

“Politically unfeasible”. The numbers prove the opposite. Worldwide, 28 percent of all CO₂ emissions are now directly priced – and in the EU, this figure will rise to 75 percent in 2028 when a second emissions trading system is launched for transport and buildings. The book shows that more and more countries, including large emerging economies, are relying on this instrument. Its success is based on its flexibility: it can be designed as a tax, as emissions trading, or as a hybrid system and thus adapted to political requirements.

Misconception 3

“Socially unjust”. Indeed, according to empirical findings cited by the research team, carbon pricing without social compensation can place a disproportionate burden on poorer households. However, this also applies to climate policy through standards or bans – and carbon pricing has the advantage of generating revenue that can be used to counteract this. Four variants of compensation are presented: a per capita flat rate, innovative climate money for buildings, a reduction in electricity costs and hardship compensation.

Misconception 4

“Obsolete model”. Why go to the trouble of establishing a pricing system when there will be nothing left to price in the climate-neutral world we are striving for? The book counters this objection with a special section on atmospheric carbon removals. These are necessary to achieve the net-zero target while there are still residual emissions that are difficult to avoid.

Later on, they can even offset exceeding the 1.5°C limit for global warming through net negative emissions. Carbon pricing can therefore help balance supply and demand for remaining emissions and removals for many decades to come, thereby creating a financing system and providing incentives for investment.

Misconception 5

“Only possible with a world government”. Does carbon pricing only make sense if everyone participates? Readers learn why a globally uniform price would not be a sensible goal – and how pricing, even if patchy and regionally fragmented, can help the climate. In this context, the international competitiveness of industry and its jobs are also discussed in detail.

The research team presents effective mechanisms that can prevent so-called carbon leakage resulting from the relocation of production. These mechanisms could even serve as a driver for increased international cooperation in the future.

“The EU’s climate tariff system, which will come into effect at the beginning of 2026, will make carbon pricing even more important internationally,” concludes PIK Director Edenhofer. “In times of increasing geopolitical tensions, this will also become relevant to security policy because it will ultimately reduce the oil and gas revenues of authoritarian states such as Russia. The career of carbon pricing has only just begun. This book explains why that is a good thing.”