Carbon pricing mechanisms: A critical analysis of their efficacy in greenhouse gas emissions reductions at a global scale.

Carbon pricing mechanisms, including carbon taxes and emissions trading schemes (ETS), are widely regarded as essential policy instruments for mitigating greenhouse gas emissions. However, despite their theoretical appeal and widespread adoption, empirical assessments of their efficacy remain inconclusive. This study undertakes a rigorous ex-post analysis of national carbon pricing policies using a staggered difference-in-differences (DiD) approach across a global dataset spanning 2000–2023. The analysis examines (i) the overall effect of carbon pricing on CO₂ emissions growth, (ii) the comparative effectiveness of ETS and carbon taxes, (iii) the role of carbon price levels, (iv) the impact of jurisdictional emissions coverage, and (v) the influence of governance factors, including government effectiveness and corruption control.

Findings indicate a lack of strong statistical significance of the impact of carbon pricing mechanisms on emissions. Emissions trading schemes (ETS) exhibit more consistent and enduring effects compared to carbon taxes, which demonstrate stronger initial reductions that weaken once fixed effects and controls are applied. While jurisdictions with higher carbon prices show marginally larger reductions, the difference between high- and low-price groups is negligible in fully specified models, reinforcing recent literature that emphasizes institutional and contextual factors over price level alone. Similarly, greater jurisdictional coverage of emissions is associated with stronger mitigation outcomes, particularly in high-emitting countries. Unexpectedly, carbon pricing appears to yield larger effects in countries with weaker governance indicators, suggesting that political context and implementation dynamics may play a more complex role in shaping outcomes than previously assumed.

These results underscore the complexity of carbon pricing efficacy, reinforcing the notion that policy design—particularly in terms of coverage, price stability, and integration with complementary measures—plays a pivotal role in determining effectiveness. While carbon pricing remains a cornerstone of market-based climate policy, its success is contingent on broader economic, institutional, and political factors. This study contributes to the growing body of ex-post evaluations on climate policy and offers critical insights for policymakers seeking to refine carbon pricing mechanisms to maximize emissions reductions and support long-term decarbonization objectives.