Interviewer: Jawhara Mosa Basha

Interviewee: Bas Gorrens

Carbon prices across Europe are rising again. The EU’s Emissions Trading System (ETS) is tightening, free allowances are being phased out, and the Carbon Border Adjustment Mechanism (CBAM) is moving closer to full implementation. Policymakers are betting that stronger, more credible climate policy will finally unlock large-scale investment in clean technologies.

But firms don’t respond only to today’s carbon price. They respond to what they believe policy will look like five, ten, or even twenty years from now.

That insight sits at the heart of new research by Bas Gorrens, a researcher at KU Leuven’s Department of Economics. His work lies at the intersection of environmental economics, international trade, and industrial organisation, and asks a deceptively simple question: when do firms decide to go green?

Climate policy is about timing, not just incentives

In his paper “When to Go Green: Firm Dynamics and Clean Technology Adoption”, Gorrens moves beyond the standard assumption that firms react mechanically to current carbon prices. Instead, he models firms as forward-looking actors that understand they are living through a transition, from a carbon-intensive economy to a low-emissions one.

“That’s what a transition means,” Gorrens explains. “Firms know they won’t end up in the same state of the world. So analysing climate policy in a static framework doesn’t really make sense.”

Clean technology adoption is costly, takes time, and often involves large irreversible investments. Firms therefore base their decisions not only on today’s costs, but on expectations about future carbon prices, technological progress, and policy credibility.

Why firms often wait, and why that can be rational

A common frustration among policymakers is that carbon pricing has existed for years, yet firms have not immediately decarbonize. Gorrens’ model offers a different interpretation.

Waiting does not mean firms are ignoring climate policy. Instead, delay can be the rational response when future conditions are expected to improve. Clean technologies are likely to become cheaper over time, uncertainty about future prices may be high, and firms may prefer to invest once policy signals are clearer.

“There’s a trade-off,” Gorrens says. “Adopt early and pay high technology costs, or wait and face higher carbon prices later. Firms choose the timing that minimises those costs.”

Crucially, under the EU ETS, firms cannot ignore policy indefinitely. As emissions allowances tighten, the price rises, eventually forcing firms to either invest in clean technologies or reduce output.

Were low carbon prices a failure?

For much of the 2010s and early 2020s, EU carbon prices remained relatively low, prompting criticism that the ETS was ineffective. Gorrens argues this view misses the bigger picture.

Low prices were not a policy failure, but a predictable outcome of a gradual and credible transition. Moving too fast would have imposed severe economic costs and risked political backlash. Moving gradually gave firms time to adapt.

There is also a market mechanism at work: as firms anticipate higher future prices and begin adopting cleaner technologies early, emissions fall faster than expected, temporarily pushing prices down. What looks like weak policy is, in part, evidence that expectations are doing their job.

Who moves first?

The transition is not driven evenly across the economy. Gorrens finds that large, highly polluting firms adopt clean technologies earliest. These firms face the greatest exposure to carbon pricing and also have the financial capacity to absorb large upfront investments.

Over time, smaller and cleaner firms catch up, but early action is concentrated among the biggest emitters, precisely where policymakers want change to happen.

Importantly, the model finds little evidence that emissions reductions are driven by firms relocating abroad. Instead, most adjustment happens within firms, through technology adoption rather than offshoring.

The true cost of reaching net zero

Concerns about competitiveness, output losses, and deindustrialisation dominate the net zero debate. But Gorrens’ simulations suggest these costs are often overstated.

Under a gradual carbon pricing pathway, output losses peak at around 2% per year relative to a no-policy baseline, far lower than estimates based on abrupt or static models.

The reason is simple: time matters. When firms have time to adjust, wait for cheaper technologies, and plan investments, emissions fall primarily through technological change rather than reduced production.

This distinction is crucial. Cutting emissions by producing less damages growth and employment. Cutting emissions by adopting clean technologies allows output to continue while decoupling it from pollution.

Do firms really need CBAM?

The EU’s CBAM is designed to protect competitiveness and prevent carbon leakage by pricing emissions embedded in imports. Gorrens sees CBAM as broadly beneficial, especially from a global perspective.

For European firms, relocation pressures are already limited if policy is gradual and credible. But CBAM plays an important role internationally by encouraging foreign producers to adopt cleaner technologies, particularly where domestic climate policy is weak or absent.

“At the global level, CBAM is objectively a good instrument,” Gorrens argues. “It helps reduce global emissions, not just protect European industry.”

One lesson for policymakers

If Gorrens had to offer policymakers a single takeaway, it would not be “raise carbon prices faster” or “expand border measures.”

Instead, he points to technology adoption.

Policies that make clean technologies cheaper, through innovation support, subsidies, and faster diffusion, may be more effective than blunt trade protections or ever-higher carbon prices.

“Adoption is what really drives results,” he says. “Anything that makes clean technologies easier and cheaper to use will accelerate the transition.”

Conclusion

Climate policy is not just about how high carbon prices are today. It is about whether firms believe the transition is real, credible, and worth investing in early.

As carbon prices rise and CBAM comes into force, the real test will be whether expectations translate into faster and broader clean technology adoption. Gorrens’ research suggests that when firms trust the direction of policy and are given time to adapt, the net zero transition can be both effective and economically manageable.