19.01.2026Beyond Carbon Pricing: Integrating Mitigation, Adaptation, and Carbon Removal

This recent scientific paper by Prof. Markus Leippold from our UZH Department of Finance and Prof. Felix Matthys from ITAM business school shows that a pure price-based strategy would require carbon prices of around 474 USD per ton of CO₂, triggering large-scale divestment from fossil capital and severe transition costs.

The paper addresses a central problem in climate economics: relying on carbon pricing alone to achieve the Paris temperature goals is both politically and economically unrealistic. A pure Pigouvian tax high enough to deliver “well below 2°C” would imply very large near-term costs, rapid scrapping of fossil-based capital, and major transition risks.

Relying on carbon taxes alone to hit the Paris 2°C target would be prohibitively expensive and politically unrealistic. A pure price-based strategy would require carbon prices of around 474 USD per ton of CO₂, triggering large-scale divestment from fossil capital and severe transition costs.

The authors therefore ask what an implementable portfolio of climate policies should look like when mitigation, adaptation, and carbon removal are all on the table, and how such a portfolio can reconcile ambitious climate goals with economic and political feasibility.

The authors develop a stochastic integrated assessment model that couples a two-box climate system (atmosphere–surface and deep ocean) with a macroeconomy featuring clean and dirty capital, endogenous clean-tech R&D, and climate damages. Policy makers choose a dynamic mix of four instruments:

• a carbon tax on current emissions,
• subsidies for clean capital and directed innovation (R&D support),
• adaptation investment to reduce damages and disaster risk, and
• carbon dioxide removal (CDR) that actively lowers the atmospheric stock of CO₂.

The model is calibrated to an RCP4.5-type pathway, capturing a realistic “intermediate” transition where fossil-based capital remains important for decades. Within this setting, the authors compute the optimal policy mix under political and transition constraints that limit how high carbon prices can realistically go. The key insight is that climate stabilization is a stock problem: pricing alone manages the flow of new emissions but does not actively reduce the legacy stock of CO₂ already in the atmosphere.

If the world relied on carbon pricing alone, the tax consistent with a 2°C target would have to rise to around 474 USD per ton of CO₂, implying massive capital scrapping and severe transition risks for the real economy. In contrast, a diversified policy portfolio that combines carbon taxes with clean-tech subsidies and R&D support, targeted adaptation investments, and scalable CDR can deliver climate stabilization at substantially lower and more realistic carbon prices – in the range of roughly 178 USD/tCO₂, or even close to 51 USD/tCO₂ in a politically constrained “second-best” setting.

Their counterfactual analysis reveals two central gaps:

• a pricing gap – if the world insists on using carbon taxes alone, the tax must climb to roughly 474 USD/tCO₂ to stay near 2°C;
• an innovation gap – if societies instead invest aggressively in clean innovation and scalable CDR technologies, the required tax can fall to more manageable levels.

In the optimal portfolio, innovation and CDR are not add-ons but core pillars: early on, strong support for clean R&D and capital helps overcome path dependence in the energy system, while later the focus shifts toward large-scale carbon removal to manage the atmospheric stock. Adaptation policies complement these measures by reducing damage and disaster risk, further improving the resilience of the economy.

The overarching message is that effective climate policy does not force a choice between economic realism and ambitious temperature goals. Instead, it requires “going beyond carbon pricing” and innovating our way out of the trade-off: combining carbon pricing with targeted support for clean technologies, adaptation, and CO₂ removal.

For policy makers, investors, and firms, this means that carbon prices remain important, but they must be embedded in a broader strategy that accelerates clean innovation and scales CDR, while building resilience through adaptation.

For a broader public audience, the takeaway is simple: prices alone won’t fix the climate – innovation, removal, and resilience must work together.

More Information:

Leippold, Markus and Matthys, Felix, Beyond Carbon Pricing: Integrating Mitigation, Adaptation, and Carbon Removal (December 30, 2025). Swiss Finance Institute Research Paper No. 26-07, Available at SSRN: https://ssrn.com/abstract=5990734 or http://dx.doi.org/10.2139/ssrn.5990734

Image source: C Cai via Unsplash (background image)

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