Webinar hosted in collaboration with The Policy Practice, and the International Institute for Sustainable Development (IISD)
19 February 2026
On19 February 2026, the International Institute for Sustainable Development (IISD) hosted a webinar looking at why carbon pricing remains so politically difficult and what kinds of strategies have been most effective in different contexts. Hosted by the International Institute for Sustainable Development (IISD), The Policy Practice, and the Thinking and Working Politically Community of Practice, this webinar brought together researchers, practitioners, and policy professionals to explore one of the most critical, and often most difficult, dimensions of climate policy: the political economy of carbon pricing.
Why Carbon Pricing Remains Politically Difficult
By Simon Dünnenberger, Neil McCulloch on March 19, 2026
Carbon pricing is widely considered one of the most efficient tools for reducing emissions—yet global experience reveals a persistent gap between its theoretical promise and the political realities of implementation. We unpack why, drawing on insights from experts and practitioners.
While technical and policy discussions about the energy transition are now commonplace, this session focused on a different question: why is carbon pricing still so politically challenging?
The core message throughout the discussion was clear: the constraints on carbon pricing are political as much as they are technical.
What are the current global trends in carbon pricing?
Globally, carbon pricing has expanded significantly over the past two decades. As of 2025, there are around 80 carbon pricing instruments in operation worldwide, covering roughly a quarter of global greenhouse gas emissions. However, only a small fraction of emissions is priced at levels consistent with recommendations from the High-Level Commission on Carbon Prices. In many countries—particularly in the Global South—prices remain low, and coverage is limited.
Carbon pricing is not a new idea. The first carbon price was introduced in 1991 in Sweden. More than 30 years later, the persistence of low ambition cannot be explained by a lack of technical knowledge. Instead, it reflects deeper political economy dynamics, including tensions between winners and losers, incumbents and reformers, short-term pressures and long-term goals.
What are the key political economy challenges of carbon pricing?
Carbon pricing reforms face four recurring political challenges according to Dr. Michael Lerner of the London School of Economics (see here for more detail).
1. Putting Carbon Pricing on the Policy Agenda
Climate change is often not the top priority for policymakers facing fiscal pressures, economic volatility, or political instability. Carbon pricing must compete with other urgent concerns. Success at this stage often depends on:
• Building coalitions within and beyond government
• Framing carbon pricing in terms of co-benefits (health, competitiveness, modernization)
• Seizing windows of opportunity such as fiscal crises or political transitions
• Responding strategically to external pressures such as carbon border adjustment mechanisms
Timing and preparedness matter: reformers must be ready when political openings arise.
2. Designing Carbon Pricing Policies That Are Politically Feasible
Even when carbon pricing reaches the agenda, negotiations encounter resistance from incumbent industries, concerns about competitiveness, and fears of social impacts. Narratives about elitism, unfair burdens, or economic harm can gain traction quickly.
Full consensus is rarely achievable, but the key is not to eliminate opposition but to manage it. Start with modest ambition but embed mechanisms to increase stringency over time:
• Carefully design revenue use, particularly to support vulnerable groups
• Pair carbon pricing with complementary policies such as green investment or subsidy reform
3. Implementing Carbon Pricing Systems
Adopting a carbon pricing policy does not guarantee impact. Implementation requires regulatory capacity, credible monitoring and enforcement, and clear communication with regulated entities.
In many developing countries, institutional capacity constraints shape design choices. Simplified systems, phased rollouts, and pilot approaches can help build familiarity and compliance. Regulators often begin with facilitative enforcement before moving to stricter approaches.
4. Sustaining and Strengthening Carbon Pricing Over Time
Carbon pricing must endure political change and gradually increase in ambition. Several reversals globally demonstrate how fragile these policies can be.
Durability depends on:
• Establishing predictable price trajectories
• Institutionalizing rules in relatively insulated bodies
• Maintaining broad coalitions
• Continually reinforcing the economic and social co-benefits
Carbon pricing is not a one-time reform — it is an ongoing political project.
What does carbon pricing look like in practice?
Philip Gass, Director of the International Institute for Sustainable Development’s (IISD’s) Energy Program, Mai Duong, Policy Advisor on Tax, Climate, and Nature at IISD, and other IISD experts shared the experience of different countries to highlight how context—political, economic, and institutional—shapes the design and outcomes of carbon pricing.
China: Expanding scope under political constraints
China’s national emissions trading system launched in July 2021 after several years of pilot programs and preparation. It is now the world’s largest by emissions coverage, regulating roughly 8 billion tonnes of CO₂ annually, around 60% of China’s emissions.
However, the system initially focused only on the power sector, despite earlier announcements that multiple carbon-intensive sectors—such as steel, cement, aluminum, chemicals, and aviation—would be included from the outset.
This narrower scope reflected political economy realities. Industrial lobbying, concerns over data quality, and technical complexity all played a role. The design itself is intensity-based rather than built around an absolute emissions cap, meaning it focuses on reducing emissions per unit of output rather than limiting total emissions. This has raised questions about overall system effectiveness and reflects the challenge of setting a clear cap in a context where national emissions have not yet peaked, and industrial growth remains a priority.
Recent policy developments suggest gradual expansion, with plans to include additional sectors and introduce an emissions cap after 2033. International trade dynamics, including the EU’s Carbon Border Adjustment Mechanism, are also increasing pressure for expansion.
China’s case illustrates how domestic industrial interests, development priorities, and international trade pressures intersect in shaping the pace and scope of carbon pricing reform.
Canada: The politics of visibility
Canada’s experience highlights the importance of policy visibility in shaping the political durability of carbon pricing.
The country introduced a federal carbon pricing framework that allowed provinces to maintain their own systems if they met national standards, with a federal “backstop” applied elsewhere. Over time, however, consumer-facing carbon pricing became increasingly contentious.
A central issue was visibility. Consumers saw carbon price increases directly at the fuel pump and on heating bills, often on a weekly or monthly basis. Rebates, by contrast, were delivered only a few times per year. Although economic analysis showed that many households, particularly lower-income households, received more in rebates than they paid in carbon costs, polling suggested that a majority believed they were worse off.
Political tensions between federal and provincial governments further complicated the situation. In some provinces, messaging highlighted the federal carbon charge at gas stations, reinforcing opposition. Exemptions for certain fuels and regions also weakened the perceived consistency of the policy. Ultimately, consumer carbon pricing was repealed, while industrial carbon pricing remained in place and is expected to strengthen.
The case illustrates how policy design, communication, and intergovernmental dynamics can shape the resilience of carbon pricing policies.
Indonesia: The parallel challenge of fossil fuel subsidy reform
Indonesia’s experience with fossil fuel subsidy reform illustrates the “flip side” of carbon pricing. Major reforms in 2014–2015 removed most gasoline subsidies and capped diesel subsidies, significantly reducing fiscal pressure at the time. However, these reforms were not institutionalized. Over time, as global energy prices rose and domestic pressures returned, subsidy spending increased again. Recent estimates indicate that in 2024, approximately IDR 713 trillion was spent on energy subsidies, with nearly 90% directed toward fossil fuels.
A key political economy challenge lies in visibility and immediacy. Energy price increases are felt directly by households through transport costs and daily expenses. Reforms are therefore quickly interpreted as political decisions rather than technical fiscal adjustments. Sudden price hikes, weak communication, and limited trust in protection mechanisms can trigger backlash. Broad price controls—rather than tightly targeted support—mean that reforms affect a large share of the population at once, amplifying political sensitivity.
Institutional coordination adds further complexity. Effective targeting requires cooperation across ministries and reliable data systems, and fragmentation can delay or weaken implementation. Current discussions around reforming the 3 kg LPG subsidy reflect attempts to move toward beneficiary-based targeting and tighter distribution controls to reduce leakage.
The experience suggests that subsidy reform, like carbon pricing, cannot be treated as a one-off measure. Durable change requires gradual adjustment, clear roadmaps, improved targeting systems, and sustained communication to build credibility and public understanding.
See IISD’s Policy Brief on implementing carbon pricing in South-East Asia for more details of progress in the region.
What These Experiences Reveal About the Politics of Carbon Pricing
Several lessons emerge across the country cases.
Communication is critical. People easily understand price increases but do not automatically recognize rebates, long-term benefits, or avoided climate damages. When costs are visible and benefits are not, public support can weaken quickly. Clear and sustained communication about tangible economic and social benefits is therefore essential.
Coalitions matter. Carbon pricing reforms are more durable when supported by broad coalitions that extend beyond climate ministries. This includes government actors, industry segments that benefit from low-carbon transitions, civil society, and external partners.
Political economy analysis must be ongoing. Stakeholder dynamics change as policies evolve. Political economy analysis should therefore be continuous rather than treated as a one-time exercise.
Policy design is inherently political. Decisions about sector coverage, price trajectories, and revenue use determine how costs and benefits are distributed. Political considerations must therefore be integrated into policy design from the start.
What Governments Should Take Away
These lessons point to several practical priorities. Governments need to communicate early and consistently so that policy benefits are as visible as costs. Clear roadmaps for reform are also important, particularly where carbon pricing is linked to fossil fuel subsidy reform.
Social considerations should be integrated from the start. Gender equality and social inclusion are often overlooked in carbon pricing debates but are essential for ensuring policies are perceived as fair.
Above all, carbon pricing should be approached as a long-term institutional process rather than a one-time reform. Its success depends not only on technical design but also on sustained political support, effective communication, and the ability to manage shifting stakeholder interests over time.
About the Event
Webinar on the Political Economy of Carbon Pricing, February 19, 2026. Hosted by IISD, The Policy Practice, and the Thinking and Working Politically Community of Practice.
Experts participating in this webinar: Dr. Michael Lerner of the London School of Economics, Neil McCulloch, The Policy Practice, Philip Gass, Director of IISD’s Energy Program, and Mai Duong, Policy Advisor on Tax, Climate, and Nature at IISD.