f97.beERIK SCHMIDT’S WORKSHOP
← All terms

Glossary · Energy industry & energy transition

Carbon price (CO₂ price)

Carbon price Emissions Trading Climate policy power system electricity market

The carbon price is the price for emitting one tonne of carbon dioxide or one tonne of CO₂ equivalent. It turns an emission into a monetary amount, usually stated in euros per tonne of CO₂. There is not one single price that applies everywhere. The term refers to an instrument of climate policy: anyone who uses fossil fuels or runs emission-intensive processes is meant to take the climate impact of these emissions into account in their costs. In Germany, two pricing systems currently apply side by side: the European emissions trading system for power plants, industry, and air and maritime transport, and the national fuel emissions trading system for heat and transport.

The reference quantity matters. How much CO₂ is produced when generating one kilowatt hour of electricity depends strongly on the fuel. Lignite causes more CO₂ per unit of electricity generated than hard coal, and hard coal more than natural gas. Wind power and photovoltaics do not emit CO₂ directly during operation. A carbon price therefore does not raise the costs of all power plants equally. It mainly burdens emission-intensive generation.

Price through trading, tax or levy

A carbon price can arise in different ways. In emissions trading, only a limited quantity of emission allowances is issued. Companies have to surrender allowances for their emissions. The price forms on the market because the allowances are scarce and traded. The political decisions concern above all the quantity of allowances (the cap), the rules for free allocation and auctions, market stabilisation mechanisms and the question of which sectors are covered.

With a carbon tax or levy, the state sets the price directly. How much is then emitted depends on how companies and consumers react to the price. Emissions trading thus controls the quantity first and lets the price fluctuate. A tax controls the price first, and the quantity of emissions depends more on demand, technology and the scope for substitution. In practice there are hybrid forms. The German fuel emissions trading system, for instance, began with fixed prices set by law and, since 2026, has auctioned allowances within a price corridor.

A distinction must be made between the carbon price and CO₂ costs, climate damage and carbon footprints. CO₂ costs are the specific additional costs that a carbon price causes in a particular process. Climate damage is the actual harm caused by climate change. It cannot simply be equated with the current allowance price. A carbon footprint describes quantities emitted, but says nothing about whether a price was paid for them and how high it was.

Systems in force in the EU and Germany (as of November 2026)

  • European Emissions Trading System 1 (EU ETS 1): It has existed since 2005 and initially covered the energy sector and energy-intensive industry. Intra-European aviation has been included since 2012 and maritime transport since 2024. The price forms on the market and fluctuates. Anyone who does not surrender an allowance for a tonne of CO₂ equivalent emitted must pay a penalty. The directive specifies 100 euros per tonne for this. The obligation to surrender allowances nevertheless remains.

  • National emissions trading under the Fuel Emissions Trading Act (BEHG): It has applied since 2021 to fuels, mainly in the heat and transport sectors. The payers are not the end consumers but the companies that place fuels on the market (upstream system). The fixed prices set by law rose from 25 euros (2021) to 30 euros (2022 and 2023) and 45 euros (2024) and then to 55 euros (2025). For 2026, the law sets a price corridor of at least 55 and at most 65 euros per allowance. The allowances are auctioned within this corridor.

  • European Emissions Trading System 2 (EU ETS 2): It covers buildings, road transport and other sectors and was originally planned for 2027. According to the German Emissions Trading Authority, it now starts in 2028 and is then to replace the national system for the most part. For 2027, according to industry sources, the Federal Cabinet adopted a BEHG amendment in August 2026 that is meant to continue the corridor of 55 to 65 euros. In the version of the law published online, this amendment was not yet included at the time of review. The price for 2027 should therefore be understood as envisaged, not as in force.

Effect on the electricity market

In the power system, the carbon price first affects the variable costs of fossil power plants. A coal or gas-fired power plant has to buy fuel and, under EU ETS 1, additionally surrender an allowance for every tonne emitted. This raises its marginal costs, that is, the cost of generating one additional kilowatt hour. The higher the specific CO₂ emissions, the more the marginal costs rise. A rough example: a lignite power plant emits about one tonne of CO₂ per megawatt hour of electricity, a modern combined-cycle gas power plant roughly a third of that. At 70 euros per tonne, the marginal costs of the lignite plant therefore rise by around 70 euros per megawatt hour, those of the gas plant by just over 20 euros.

This change in costs influences the order in which power plants are dispatched. In an electricity market with a merit order, power plants are called upon in order of ascending marginal costs. If the carbon price is high enough and fuel prices allow it, gas-fired plants therefore run ahead of coal-fired plants (fuel switching). At the same time, renewable energies become economically more attractive because they need no allowances during operation.

However, the carbon price is not the same as the electricity price. Depending on the perspective, the electricity price includes wholesale prices, grid charges, taxes, levies, and sales and procurement costs. On the power exchange, the carbon price raises the market price above all when a fossil power plant sets the price. In hours with a lot of wind and solar power, its direct influence is smaller. For end customers, the effect additionally depends on tariffs, levies, grid charges and government relief.

Why the carbon price matters in practice

A carbon price changes investment and operating decisions. For power plant operators, it shifts the economics between coal, gas, renewable energies, storage and flexible consumers. Industrial companies receive a stronger incentive to electrify processes, use waste heat, use hydrogen where direct electrification is not possible, or improve material cycles. For households and transport, it matters which system covers heating oil, natural gas, petrol or diesel. In Germany this is currently the national emissions trading system and, from 2028, presumably largely EU ETS 2.

In the power system, the carbon price is particularly relevant because electricity is increasingly meant to replace other energy carriers. Heat pumps, electric cars and electric industrial processes increase electricity demand but can displace fossil final energy. Higher electricity consumption is therefore not automatically a problem for climate policy. What matters for the emissions effect is how the additional electricity is generated, when it is needed and whether demand can be managed flexibly. A carbon price makes fossil generation more expensive. It does not, however, replace grid expansion, storage, load management and clear rules for flexibility.

The carbon price is also important for financing policy measures. Revenues from auctions or levies can be returned to households, used to reduce other components of the electricity price or invested in climate action. In the German fuel emissions trading system, the proceeds accrue to the federal government. How a carbon price is distributed across income groups depends heavily on how the revenues are used. The costs are often passed on through product and energy prices or rents. Without compensation, this hits low-income households relatively harder, because energy makes up a larger share of their budget.

Common oversimplifications

A common mistake is to regard the carbon price as a steering instrument that is sufficient on its own. A price influences many decisions. But it does not remove permitting hurdles, does not create grid connections, does not automatically speed up planning procedures and does not guarantee that climate-neutral technology is available. If a company cannot yet technically use an electric alternative or lacks a grid connection, the carbon price initially causes only costs, but no switch.

A second oversimplification sees the carbon price as a moral penalty price. Institutionally, it is a rule under which emissions are included in costs. It is meant to make lower-emission options economically more competitive. Real sanctions must be distinguished from it, for example the payment under EU ETS 1 if allowances are not surrendered in time. Whether a carbon price works efficiently and in a socially sustainable way depends on its level, its scope, the transitional rules and the use of the revenues.

The statement that companies always bear the carbon price entirely themselves is also misleading. Whether they can pass on the costs depends on demand, competition, international trade and regulation. Electricity generators can include CO₂ costs in exchange prices if their power plants help determine the price. Industrial companies facing international competition often find this harder. That is why there are rules such as free allocation, the carbon border adjustment mechanism or carbon contracts for difference.

Another mistake is the assumption that a high carbon price automatically means low emissions. In emissions trading with a fixed cap, the quantity of allowances limits emissions in the covered area. The price then indicates how scarce the allowances are and what abatement costs. With a tax, a high price can reduce emissions, but the quantity is not guaranteed in advance. The German price corridor combines both: it dampens price fluctuations but weakens the strict quantity limit. In all cases, uncovered areas, relocation abroad and interactions with other instruments must be kept in mind.

Distinction from related terms

The carbon price is not an emission factor. An emission factor states how much CO₂ arises from an activity, for example in grams of CO₂ per kilowatt hour of electricity or kilograms of CO₂ per litre of fuel. The carbon price puts a monetary value on this quantity. Both figures are often used together to calculate CO₂ costs: emission factor times carbon price gives the burden per unit.

Nor is it a climate target. A climate target sets which emission reduction is to be achieved. The carbon price is an instrument that can contribute to this. Whether it is sufficient depends on its level, its predictability, its scope and the complementary rules. For investments in power plants, grids, storage or industrial plants, what counts is not only today's price but the expected development over many years. The transition from the national system to EU ETS 2 in particular currently makes this expectation uncertain.

The carbon price must also be distinguished from system costs. It makes visible costs that previously lay outside business calculations, but it does not reflect all costs of the power system. Grid expansion, reserve capacity, redispatch, security of supply and storage needs follow their own cost and regulatory logics. A lower-emission power system therefore additionally needs rules for infrastructure, market integration and firm capacity.

In summary: the carbon price makes fossil emissions visible in economic decisions. Its effect depends on which emissions are covered, how scarce the allowances are or how high the levies are, whether alternatives are available and how the revenues are distributed. In the power system, it mainly changes the relative costs of fossil generation and thereby power plant dispatch, investment and prices. On its own, however, it explains neither the level of the electricity price nor the pace of the transformation.

Sources

Related glossary entries

Edited by eCMS on 11.11.2026 17:45

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.