Higher emission prices can accelerate the green transition
Carbon pricing is often highlighted as a key tool for reducing emissions and driving the green transition. But does it actually work in practice? Gustav Martinsson, a professor of Finance at Stockholm Business School, studies whether putting a higher price on carbon leads to lower emissions.
“Our research shows that a higher carbon tax leads to reduced emissions. Companies respond strongly when it actually costs money to emit greenhouse gases. It’s crucial that carbon pricing affects companies' core business and profits - otherwise, the impact may be too weak and risk resulting in so-called greenwashing,” says Gustav Martinsson.
A method with proven impact
Gustav Martinsson and his colleagues are examining how carbon taxes and emissions allowances influence Swedish companies to adapt their production technology and behaviour.
Using a unique Swedish data set covering up to 4,000 manufacturing companies from the year 1990 onward, the researchers studied how carbon pricing affects actual emissions.
“When emissions become more expensive, companies adapt by improving efficiency or investing in cleaner technology,” Gustav Martinsson explains.
The research has already yielded concrete findings. For example, a one percent increase in the carbon tax leads to a more than two percent reduction in emissions per unit produced.
Carbon pricing as an effective policy tool
Increasing carbon prices can lead to further emissions reductions - as long as companies have the opportunity to adapt through innovation and new technology. However, if prices rise too sharply without viable alternatives, there is a risk that companies lose competitiveness and may be forced to relocate production abroad instead of cutting emissions.
For both policymakers and business leaders, the challenge lies in finding the right balance - setting a price high enough to drive change, but not so high that it causes unintended economic consequences.
“By creating the right incentives, we can reduce emissions while maintaining companies’ competitiveness,” says Gustav Martinsson.
Zooming in: the transport sector
In a current research project, Gustav Martinsson and his team are exploring how to effectively reduce emissions in the transport sector.
In Sweden, transportation accounts for roughly one-third of domestic greenhouse gas emissions. And while e-commerce is booming, few consumers are willing to pay more for sustainable delivery options.
According to Transportföretagen, Swedish consumers received over 50 million parcels from e-commerce in the third quarter of 2024. During the same time period, imported parcels increased by almost 30 percent, with Chinese platforms Shein and Temu shipping thousands of tons of goods - daily.
“With this data set, we can track emissions from major hauliers down to the truck level,” says Gustav Martinsson.
Fuel prices and driving behaviour play a crucial role in the effort to decarbonize transportation. But how does diesel cost affect haulage companies and the behaviour of individual drivers? The researchers aim to find out.
Another key factor is company size. Smaller hauliers may struggle more with rising fuel costs, potentially accelerating consolidation in the industry.
“What are the broader consequences? And do smaller companies need targeted support to be part of the transition? That is what we want to understand,” says Gustav Martinsson.
The future of climate policy
Research shows that carbon pricing works and can be a powerful tool in the climate transition. The future of climate policy may lie in fine-tuning existing economic instruments - making them strong enough to reduce emissions, but also flexible enough to support sustainable business development.
“The solution lies in international coordination, fair cost structures, and making climate policy a serious force - for both the environment and the economy,” Gustav Martinsson concludes.
Read more about Gustav Martinsson
Last updated: June 2, 2025
Source: Communications Office