Award-winning paper on CO2 pricesWhen climate policies collide

1 April 2026, by Stephanie Janssen

Photo: M. Skubatz

Shedding light on the impact of climate protection measures: Prof. Grischa Perino has been honored by the Royal Economic Society.

The Economic Journal has recognized Grischa Perino with its Best Article of the Year prize for 2025. Founded in 1891, the prestigious journal is published by the UK’s Royal Economic Society. By being selected, Perino, Professor of Environmental Economics and ESRAH Director, now joins the ranks of award-winning economists, including two Nobel Prize winners. His topic: the challenges and contradictions of carbon pricing and other climate policies.

Professor Perino, in your award-winning article “Overlapping Climate Policies” you, together with Robert Ritz and Arthur van Benthem, describe how climate protection measures can be counterproductive or complementary. Why is the topic important?
In the article, for the first time we systematically examine which types of climate protection measure fit well together, and which ones don’t. Many European countries have policies in place that aren’t fully compatible with the EU-wide emissions trading system – and therefore don’t produce the desired reductions in total emissions.

What’s the problem?
In Germany, there were lengthy discussions as to whether shutting down our coal-fired power plants would have any effect at all. Of course it’s fundamentally good to stop burning coal, that is, to not emit additional CO₂ into the atmosphere. But under the European Union Emission Trading System (EU ETS), Europe’s coal-fired power plants and industry are only allowed to produce a certain amount of CO₂ emissions anyway. For each metric ton of emissions, they have to use a certificate. If a given company no longer needs as many certificates as in the past because it now burns less coal, its “pollution rights” can be sold and used to cover some other party’s emissions. And that means, as long as the total number of certificates isn’t reduced, the whole thing is a zero-sum game.

Here in Germany, the federal government has taken steps to intervene.
Right. In 2025 it began selling fewer certificates than it was actually entitled to, so that phasing out coal would produce the desired climate effect. In addition, the EU emissions trading system includes a mechanism that automatically removes certificates: the Market Stability Reserve.

And these instruments influence each other.
Right. Which is why we looked into how these measures could most effectively be combined: the legally regulated phasing out of coal; automatic removal of certificates in the emissions trading system; and governments’ efforts to reduce their total number of certificates. And not just in connection with the EU ETS and phasing out coal in Germany, but also for different carbon pricing variants and for a broad range of climate protection measures, like expanding renewable energy, or requirements for energy efficiency.

What would be an effective measure for EU countries?
Countries could more effectively cut CO₂ emissions by reducing the demand for climate-harmful products instead of limiting production – in other words, it would be better to expand renewable energy with turbines and solar parks or to impose a nationwide flight tax than to pass a law shutting down a coal-fired power plant. When they limit production in a given region, but demand for dirty goods remains unaffected, other fossil-fired power plants could simply fill in the gap.

Industry and even some federal governments are currently up in arms about the EU ETS. Italy is subsidizing its gas-fired power plants to protect them from the effects of CO₂ pricing. Is European climate protection starting to crumble?

We’re in a delicate phase. At the EU level, important negotiations on the future of emissions trading are currently underway. Many industrial sectors are in a difficult situation and in an uproar because they expect to see rising costs. Until recently, industry had it good. They received the majority of the certificates for free – effectively a subsidy amounting to billions, which are now to be discontinued. But the ETS has been around for 20 years; they simply missed the bus. That’s why some EU countries now want to completely do away with emissions trading to protect their own economies. But that would be crazy. Getting rid of the EU ETS would mean throwing the baby out with the bathwater. In reality, the fact that Italy has exempted its gas-fired power plants from carbon pricing boils down to subsidizing environmental pollution.

What would you recommend?
Above all, not lowering our climate targets! Plus, emissions trading should be made more effective.

How could emissions trading be improved?
The emissions trading system needs to be more capable of self-correcting. Then we’d need fewer emergency summits and its interactions with other climate protection measures could be more easily predicted. This could be achieved by basing the number of certificates on their current price.

How would that work, exactly?
When the price drops, fewer certificates should be issued. That would directly counteract the declining price. When the price climbs again, more certificates could be issued so as to keep the burden for companies and consumers manageable.
The current emissions trading system may not be perfect, but weakening it or doing away with it completely would most likely be the death stroke for the EU’s climate targets, and therefore for Germany’s, too.

Because then climate-friendly production would no longer be worthwhile?
Exactly. Emissions trading ensures that those who produce greenhouse-gas emissions have to pay for doing so. As a result, investing in climate protection pays off. And the more the certificates cost, the more incentive there is to invest in clean technologies. If the price for carbon were done away with or substantially reduced, the investments would dry up. And those who had already invested would essentially be punished, since they’d have high costs but wouldn’t enjoy any benefits from having to spend less on carbon pricing than their dirty competitors.