What Role Do Carbon Pricing Mechanisms Play in Attracting Global Sustainable Investment Flows?

This research examines how carbon pricing mechanisms can help in enhancing the level of sustainable investments. Initially, carbon pricing through carbon taxes and emissions trading systems (ETS) was supposed to internalize the external costs of GHG emissions, thus changing the investment incentives, leading to lower transition risk, and promoting investments in low-carbon projects. The study uses data from the World Bank Carbon Pricing Dashboard and the Global Sustainable Investment Alliance (GSIA) and tracks globally the trends from 2012 to 2022 regarding carbon pricing revenues, average carbon prices, total amounts of sustainable investments, and their modifications. The results demonstrate that there is a great correlation over time between the expansion of carbon pricing and sustainable investments. In 2012, carbon pricing revenues totaled about $353 million, while in 2022 they reached $1.42 billion. At the same time, total sustainable investment increased from $13.3 trillion to $30.3 trillion in the same period. The elements of sustainable investment changed as well as ESG integration, corporate engagement, positive screening, and sustainability-themed investments became popular. The evidence suggests that carbon pricing may enhance the credibility of the policies, create revenue sources for green investments, and re-direct the capital to the low-carbon economy. However, the study does not establish causality due to its aggregated global data and descriptive methodology. The findings therefore support coordinated and appropriately designed carbon pricing policies as a potential catalyst for sustainable finance.