A recent ifo Business Survey of 830 German manufacturing firms examined the carbon price levels needed to trigger investment in green projects and how uncertainty over future carbon prices affects firms’ investment decisions.

The survey considered seven carbon price levels ranging from €50 to €200 per ton of CO₂, covering a plausible range from the EU Emissions Trading System (EU ETS) lows reached in February 2024 to levels consistent with Paris-aligned climate pathways.

The results indicate that a carbon price of roughly €50 per ton is generally too low to make climate-friendly projects economically attractive to the companies surveyed. By contrast, when firms expect the CO₂ price to reach €175 per ton, they are much more likely to proceed with green investments.

“Currently, the prices of the European emissions trading system, at around €70 to €90, are close to the threshold at which an average industrial company in Germany begins to invest in climate-friendly measures, but a large proportion are likely still hesitant,” says ifo researcher Gerome Wolf.

However, the level of the carbon price is not the only factor influencing investment decisions. The survey also shows that uncertainty and strong price fluctuations can discourage companies from committing capital to climate-friendly projects, even when average CO₂ prices are relatively high.

“The CO₂ price only unfolds its full effect if there are no significant price fluctuations. As soon as companies anticipate a high degree of volatility, they wait and do not invest, even if the average price is high,” explained Matti Liski, professor at Aalto University.