Can a carbon price floor spur low-carbon investment?

A carbon price floor, when set at a sufficiently high level, can lead to higher low-carbon investment by firms, according to research by Hertie School Professor of Sustainability Christian Flachsland and co-authors Nils Ohlendorf, Gregory Nemet, and Jan Christoph Steckel. This finding supports the idea that a carbon price floor can be an important design element of emissions trading schemes (ETS).

In their article, “Carbon price floors and low-carbon investment: A survey of German firms,” published in the October 2022 issue of Energy Policy, the researchers analysed survey responses from high-level managers at 113 energy and industry companies to find out how a carbon price floor would affect the firms’ investment decisions. Their results showed that a low price floor had relatively little impact on most firms’ investment decisions, but a higher price floor was associated with higher low-carbon investments and possibly some reduction in fossil energy investment.

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