THE GREEN PREMIUM
A reflection in today's world.
Over the last couple of weeks I’ve been trying to organise my notes and thoughts around the Green Premium: the extra cost of choosing a clean option instead of a fossil one. This simple concept sits at the foundation of every decarbonisation pathway in all major economies. For years, the Green Premium helped explain why climate solutions were slow to scale and why innovation struggled to break through. But the world has changed. We can’t wait for cost parity anymore, and we can’t expect people or companies to pay more just because something is “green”. That expectation has collapsed, pushed down by geopolitical instability and by a growing narrative that sustainability adds costs and reduces competitiveness.
Bill Gates said it clearly in a recent MIT Technology Review essay:
“So if I could offer one piece of advice to every company working on zero-carbon technologies, it would be to focus on lowering and eliminating the Green Premium.”
Because the transition ultimately comes down to one equation:
Green Premium = Cost of Clean – Cost of Fossil
When that number hits zero, the market moves. That’s why solar, wind, EVs, batteries and heat pumps scaled: costs fell, learning curves accelerated, and suddenly the clean option wasn’t the expensive one anymore. When the Green Premium disappears, economics takes over.
We’ve lived this before. Renewables in emerging markets only became bankable once someone absorbed the early Green Premium: PPAs, feed-in tariffs, subsidies, CfDs, tenders and in many countries, carbon finance. These instruments carried the early risk. Scale did the rest. Today renewables are cheaper than fossil power. Exactly how the transition should work.
But the picture changes completely in the hard-to-abate sectors: aviation, shipping, cement, steel, high-temperature industrial heat, waste, fertilisers, agriculture. These sectors are “hard” because the Green Premium is still enormous — and because the clean technologies often do not yet exist at scale. Hard-to-abate doesn’t mean complicated physics. It means the economics and technology readiness levels do not match the climate timeline.
Most internal abatement options in real ETS installations : efficiency, fuel switching, CCS, process redesign cost around €100–150/t. With ETS prices rising toward €150–200/t, paying for emissions becomes more expensive than reducing them. The ETS does exactly what it is designed to do: it makes internal abatement the rational choice whenever the option exists.
Now look at removals. BECCS today costs €200–300/t. DAC ranges between €600–900/t. Even optimistic 2040 scenarios place BECCS at €150–200 and DAC at €300 — still far above likely ETS prices.
The logic is simple: If you can cut emissions internally at €120/t, you will not buy removals at €200–300/t. Nobody will. And they shouldn’t.
So removals apply only to the last slice of emissions , where CCS is technically impossible or where every other option is even more expensive. Aviation is a perfect example. This is the true intersection between the Green Premium and the hard-to-abate challenge: the last tonnes are expensive because the technologies are not there yet.
Which brings me back to Bill Gates’ question: How do we reduce the Green Premium as much as possible?
This week, during a carbon-market roundtable at the IEA in Paris, one expert summarised it perfectly: “The ETS drives internal abatement. Governments drive new technology adoption.”
Recent data confirm this. The ETS delivers where the economics allow it: power-sector emissions are now 50% below 2005 levels; in 2024 alone power emissions fell nearly 11%, with total fuel-combustion emissions down 9%. Meanwhile the ETS raised €38.8 billion in 2024 (more than €250 billion since its inception) a resource pool that funds the first-mover phase of deep decarbonisation where the Green Premium remains high.
And these revenues already support the next wave of climate technologies.
The EU’s Innovation Fund, financed directly through ETS auctions, is now one of the world’s largest clean-tech investment programmes, supporting CCS, BECCS and waste-to-energy capture projects across Europe.
I saw this firsthand while advising a major Italian utility on CDR and biogenic emissions. Their first waste-to-energy CCS project only became viable once the Innovation Fund stepped in to cover part of the CAPEX. ETS price forecasts alone could never justify the investment. The Fund bridged the Green Premium and made the project real without it, nothing would have been built.
And there is a recent development gaining momentum worldwide: transition credits for early coal decommissioning. They are one of the most interesting examples of how a carbon-finance instrument, in this case carbon credits, can reduce a Green Premium that is otherwise impossible to absorb. The economics of shutting down a coal plant early are brutal: you lose cheap, already-paid-for baseload power and must replace it with more expensive new capacity. No utility can justify this on market signals alone. Transition credits turn the avoided emissions from early closure into a revenue stream, reducing the Green Premium just enough to make the transition viable. This is carbon pricing at the project level rather than the system level. And while demand is still voluntary, momentum is growing across Indonesia, Vietnam, South Africa and several Indian states. Transition credits show a simple truth: carbon markets cannot replace policy, but they can unlock transitions that would otherwise remain stuck.
All these examples from ETS-driven abatement to Innovation Fund support, from BECCS deployment to transition credits, point to the same underlying reality: every climate solution depends on how we manage the Green Premium. Carbon pricing can push companies toward the cheapest internal abatement, but only where solutions already exist. Government support can make new technologies investable long before the market is ready. And carbon finance, whether through removals or transition mechanisms, can bridge the gap where innovation needs time before scale can take over.
There is no single instrument capable of eliminating every Green Premium. But together these tools shape the economic architecture of the transition: carbon pricing creates pressure, public funding absorbs the early cost of innovation, and carbon markets help unlock the spaces in between. As technologies scale, the premium shrinks, just as it did for renewables.
In the end, the question is not ideological but practical: how do we distribute the Green Premium over time and across instruments so that deep technologies have a pathway to become affordable and widely deployed? Decarbonisation will not happen because the world suddenly decides to pay more. It will happen because we design systems that make the clean option the economical option.