Carbon pricing – putting a price on pollution – is one of the most effective tools to tackle climate change. It encourages cleaner choices, drives innovation and generates revenues that are reinvested in people and communities to support the clean transition. But it is often misunderstood.
The EU uses carbon markets to put a price on pollution, through the EU Emissions Trading System (EU ETS), which covers the power sector, industry, shipping and some emissions from aviation. In the future, the new ETS2 will cover emissions from road transport and buildings, starting in 2027, to ensure more parts of the economy contribute to the green transition.
Here are five key facts that show how carbon pricing works, and why it benefits everyone.
- Carbon pricing cuts emissions while powering economic growth
- Carbon pricing works. Since its launch 20 years ago, the EU ETS has helped cut emissions from electricity, heat generation and industry by 50%. In 2024 alone, ETS emissions fell by 5% compared to 2023.
- Carbon pricing improves predictability for business. The EU ETS lowers the emissions cap each year in a predictable way, sending a clear long-term signal to companies that there is a business case for clean technologies. This helps businesses to plan ahead and invest in low-emission technologies, knowing their investments will stay competitive and pay off over time.
- Carbon pricing makes Europe more competitive. It drives industrial modernisation and unlocks clean technology investment. The EU has developed a strong global position in wind power, electrolyser manufacturing and heat pump deployment, with green tech exports reaching €90 billion in 2024.
- Carbon pricing powers innovation. Competitiveness increasingly depends on innovative clean technologies. Carbon pricing sets a clear direction, while providing flexibility on how to get there. Each company can tailor its pathway, spurring diverse innovations in energy, materials and transport.
- Carbon pricing funds innovative climate action. For example, the Innovation Fund and Modernisation Fund are fully financed by revenue from the EU ETS. The Innovation Fund is one of the world’s largest funding programmes for clean technology. Since 2021, it has invested around €12 billion in nearly 200 projects of different scales and sectors, including pioneering low-carbon steel and floating windfarms.
- Our carbon pricing system includes measures to ensure a level playing field with third countries. It avoids displacing industrial activities and related emissions, as well as promoting carbon pricing abroad. Measures to ensure a level playing field and avoid carbon leakage are built into our policy framework. Targeted free allowances and the Carbon Border Adjustment Mechanism (CBAM) aim to ensure that emissions and related industrial activities are not simply displaced to countries outside Europe where climate rules may be weaker. The introduction of CBAM has helped us to advance our carbon pricing diplomacy and encourage other countries around the world to introduce their own carbon pricing systems.
- Carbon pricing revenues support European jobs. By 2030, over 1 million new jobs could be created in clean industries, energy efficiency, and green transport – supported by revenue recycling, retraining schemes, and regional investment under the ETS. The Modernisation Fund supports the transition to cleaner energy and greater efficiency in lower‑income EU countries. It provides financing for things like renewable energy, energy‑efficient infrastructure, modernised power grids and support for communities that rely on coal, oil, or other high-pollution industries to help them shift to cleaner jobs.
- Carbon pricing promotes energy independence
- Carbon pricing reduces the EU’s energy dependence. Reliance on imported fossil fuels drives high energy costs in Europe. The EU’s energy import bill was almost €400 billion in 2024. Putting a price on polluting fossil fuel imports drives investment in homegrown clean energy sources, meaning money stays in European pockets.
- Carbon pricing boosts clean, affordable energy. In 2023, almost half of the EU’s electricity came from renewables – and when including nuclear, nearly 70% was generated from zero-emission sources. Price signals from the ETS make these clean energy investments more attractive and encourage consumers to use cheaper, cleaner energy sources.
- Carbon pricing makes our economy and society more resilient. Carbon pricing helps reduce exposure to geopolitical volatility and strengthens our energy sovereignty and security.
- Carbon pricing contributes to cleaner air and improves your health
- Carbon pricing contributes to cleaner air. It discourages fossil fuel use, cutting harmful pollutants like sulfur oxides (SOx), nitrogen oxides (NOx) and fine particulate matter (PM2.5).
- Carbon pricing benefits human health. By reducing air pollution, carbon pricing helps prevent asthma, respiratory illness, cardiovascular disease, and premature deaths. Cleaner air saves on healthcare costs and improves quality of life, especially in urban areas.
- Carbon revenues flow back to society
- Carbon revenues directly benefit society, the economy and your daily life. The EU ETS has generated over 200 billion in revenues for Member States. These funds are reinvested directly in clean public transport, energy-efficient housing, and modern infrastructure that improves daily life for millions, such as new green buses in Hungary, flood risk management in Estonia or a mobility voucher programme in Italy.
- Carbon pricing supports those in need. The Social Climate Fund will mobilise at least €86.7 billion between 2026–2032, from ETS revenues. It will support home insulation, low-emission mobility, and access to affordable clean energy – especially for vulnerable groups.
- Carbon pricing reduces regional disparities. The Modernisation Fund channels revenues to modernise energy systems in 13 Member States in Central, Eastern and Southern Europe. Over €19 billion has already been invested in upgrading grids, renewables and energy access.
- Carbon pricing makes economic sense, it’s fair and it expands globally
- It makes the polluters pay. The EU ETS is based on the polluter pays principle, those who emit greenhouse gases must pay by buying allowances for their emissions. This ensures that the cost of pollution is not passed on to society or future generations, but is instead borne by those responsible, creating a fair incentive to reduce emissions.
- Carbon pricing turns pollution into innovation. The system rewards those who invest in low-carbon solutions – no matter where in Europe or which sector. It’s a market-based driver of climate action that levels the playing field.
- Carbon pricing supports solidarity. Mechanisms like the Modernisation Fund and the Social Climate Fund redistribute revenues to lower-income Member States and households, making the transition fair and inclusive.
- Carbon pricing applies equally across the EU, Norway, Iceland and Liechtenstein.
The same rules and market conditions ensure fairness across borders. The system does not target specific countries — it applies uniformly to all polluters, regardless of where they are based. Every installation or operator is treated according to the same emissions thresholds and compliance requirements. The EU Emissions Trading System (ETS) is linked to Switzerland’s carbon market, and work is underway to link it with the UK’s system as well. - Carbon pricing is a proven approach used in an increasing number of countries worldwide. It is already in place in countries such as China, South Korea, New Zealand, Canada and several US states. New systems are being developed in Brazil, Turkey, Japan, India and many more. According to the World bank more than 80 jurisdictions have a carbon price in place and these cover half of global emissions from the power sector.
Carbon pricing helps cut emissions, strengthens energy independence, and supports people and regions through the green transition. It is fair, effective, and essential to reaching Europe’s climate goals, and to building a cleaner, more resilient economy for all. If you’d like to understand how the ETS works in more detail, take a look at our explainer video:
