When Do Firms Invest Green? Carbon Prices, Uncertainty, and Policy Credibility

Mathias Dolls, Sebastian Link, Matti Liski and Gerome Wolf

No 58, EconPol Policy Reports from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: Europe's green transition requires an unprecedented volume of private investment. Despite rising carbon prices in the EU Emissions Trading System (ETS) – captured by the ETS Emission Allowances – corporate investments in climate-related initiatives remain insufficient to align with the goals set forth in the Paris Agreement. This shortfall raises critical questions: At what carbon price levels will firms invest in green projects? Additionally, how does uncertainty about future prices affect their decisions?To address these issues, the authors of this report conducted a conjoint survey experiment involving 830 German manufacturing firms. The results reveal that price levels and price stability are both crucial for decarbonization. While higher expected carbon prices strongly incentivize corporate action, with firms favoring green projects as prices cross the EUR 90–100 threshold, volatility severely deters it. High uncertainty about future prices creates a "wait-and-see" effect that completely offsets the positive impact of a massive carbon price increase. Furthermore, institutional trust acts as a powerful multiplier; firms that perceive climate policies as credible are substantially more willing to commit capital.Therefore, unlocking private green investment requires policymakers to do more than sustain ambitious carbon prices. They must actively reduce downside risks by implementing robust price stabilization mechanisms, such as price floors or corridors, and ensure long-term institutional commitment. These elements need to be incorporated into the future reform of the EU ETS framework, especially ETS-2, which is now expected to become fully operational in 2028.

Date: 2026
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