Carbon pricing hits the political wall
While the last three years have been the warmest on record and climate-related damages are mounting into the hundreds of billions, Europe now finds itself debating a delay of what was meant to be the backbone of its climate architecture: the CO₂ price.
At the economic summit in Antwerp, German Chancellor Friedrich Merz signalled openness “to a revision or at least a postponement” of ETS 2—the extension of the EU’s emissions trading system to heating and transport fuels, scheduled for 2028. Unlike the original ETS, which targeted power generation and heavy industry, this expansion reaches directly into households’ fuel tanks and boilers. It is therefore politically explosive.
What is striking is not that politicians hesitate. Carbon pricing was always going to become a bargaining chip once it hit consumers directly. What is striking is the relative quiet from those who long portrayed pricing as the economically superior—almost sufficient—answer to climate change.
To be clear: the EU’s existing ETS has delivered results. In sectors where technological alternatives were maturing and infrastructure expanding, emissions have fallen significantly; German installations under ETS 1 reduced emissions by roughly 47% since 2005. But this success was not the triumph of price theory alone. It was underpinned by subsidies, industrial policy and viable substitutes.
When prices are not enough
In buildings and transport, the economics look different. Heat pumps, building renovations, electric vehicles and rail infrastructure require large upfront investments. Households face credit constraints, landlord-tenant dilemmas and limited alternatives. In the short run, demand for fossil energy in these sectors is largely inelastic.
Under such conditions, a carbon price behaves less like a steering mechanism and more like a surcharge.
Without redistribution, it is regressive. Without parallel investment, it cannot deliver structural change. A price coordinates at the margin; it does not build infrastructure or reallocate capital stock on its own.
None of this means carbon pricing should be abandoned. It remains an essential instrument for internalising external costs and preventing carbon leakage. But the fixation on price signals has obscured a deeper question: who owns the assets that generate emissions, who captures the economic rents from resource extraction, and who benefits from the use of common goods such as the atmosphere?
Anyone who relies on a single instrument to drive a transformation of this magnitude neither does justice to its complexity nor to its urgency. Worse still is the assumption that markets operate as if actors are fully rational, that competition automatically directs resources efficiently, and that long-term equilibrium will somehow deliver justice if interference is kept to a minimum. Beneath the surface sits an ideology. What it has delivered instead is—in the words of Martin Wolf—quite the opposite.
The return of rent
This is where the debate needs widening. The challenge at the heart of economics, as classical thinkers from Adam Smith through Henry George, Karl Marx and John Maynard Keynes understood, is what to do about economic rents.
Economic rent is unearned income derived from ownership or control of scarce assets—land, mineral rights, water rights, intellectual property, monopolies—where returns exceed the cost of providing the good or service. It is income gained not from productive contribution, but from control over access.
The term has fallen out of everyday use, but it is even more important today than it was before. Attention should be focused on rent extraction and rent seeking, not just on price signals in an imaginary marketplace.
The Earth4All initiative proposes complementing pricing with a Universal Basic Dividend. The idea is straightforward: levy fees on the use or extraction of common resources—carbon, land value, minerals, certain forms of financial rent—place them into a Commons Wealth Fund, and redistribute the dividends from that fund equally to all citizens, or return the proceeds directly.
Instead of primarily taxing labour and consumption, the fiscal focus shifts toward unearned income derived from economic rents. The approach seeks to close the loop on property rights and distribute the surplus to the co-owners of the commons. As Guy Standing and others remind us, a fee-and-dividend model links environmental limits to economic justice: those who extract or pollute pay; all receive a dividend.
This is more than a carbon rebate. It is a structural intervention in how wealth is generated and shared. By channelling resource rents into a citizens’ wealth fund, managed with long-term and intergenerational considerations in mind, the state recognises that natural assets are not simply inputs to private profit but part of a shared inheritance.
And it is not only natural assets. The social inheritance—accumulated human knowledge, institutions, public infrastructure—is also being enclosed and monetised at pace. The rapid consolidation of intellectual property in the digital and AI economy is a contemporary expression of the same logic: enclosure, rent extraction, and resale of what was socially produced. The environmental costs of that enclosure, in energy and water use, are not trivial. Nor are the labour market consequences. If labour and consumption taxes become increasingly fragile bases for public finance, the question of rents becomes unavoidable.
From price signals to shared wealth
The concept is not theoretical. The Alaska Permanent Fund, financed by oil revenues, has paid annual dividends to residents for decades. Norway’s sovereign wealth fund operates on a related logic. These examples are imperfect, but they demonstrate that resource rents can be socialised through institutional design.
Seen from this angle, carbon pricing is necessary but incomplete. It addresses the price of emissions, not the capture and distribution of underlying rents. It adjusts flows, not ownership structures.
The political fragility of ETS 2 reflects this gap. If households experience climate policy primarily as rising fuel bills, resistance is predictable. If, instead, carbon fees are visibly recycled as an equal dividend within a broader framework of public investment and infrastructure build-out, the narrative changes. Climate action becomes not only a cost but also a claim on shared wealth.
A Commons Wealth Fund operating at arm’s length from day-to-day politics can provide transparency: here are the fees; here is the dividend; apart from administration costs, nothing is diverted elsewhere. That clarity matters. It speaks to fairness.
Climate transformation cannot succeed as a narrow technocratic correction layered onto rentier capitalism. Nor can it be sustained through a politics of sacrifice imposed disproportionately on those with the least room to manoeuvre. Transformation is a reordering of capital, infrastructure and income streams. It is about who pays, who benefits and who owns.
Unless carbon pricing is embedded in a broader fiscal architecture that addresses rents, ownership and distribution, it will continue to falter under social and political pressure. Circulation to the periphery prevents necrosis as much in societies as in living organisms. This much should be obvious.
Europe’s debate over ETS 2 is therefore not only about the timing of a price instrument. It is about whether climate policy remains confined to price signals and a narrow focus on carbon dioxide, or evolves into a deeper structural reform that aligns ecological limits with a renewed social and economic compact—one grounded in honouring the demos and recognising that the commons belongs to all.
