Carbon pricing is getting more expensive — Bloomberg reports that carbon market costs are a growing financial risk for companies across oil, manufacturing, and other heavy industries, even as political pressure to decarbonize softens in the US. Europe is preparing a significant expansion of its carbon pricing architecture, with Reuters reporting on a new ETS2 scheme targeting buildings and road transport, backed by an €86 billion Social Climate Fund.
The direction is clear: more sectors, more coverage, higher prices. What's less discussed is the part of the system that determines whether any of this actually reduces emissions — the baseline.
The Number That Decides Everything
A carbon pricing scheme works like this: you set a limit on emissions, you make exceeding that limit expensive, and you lower the limit over time. Simple enough. But the limit — the baseline — has to be set somewhere. And whoever sets it has enormous power to make the system look rigorous while delivering very little.
The mechanics of baseline manipulation aren't exotic. They're accounting. Set the baseline high enough relative to actual operations, and a facility can "reduce emissions" simply by not expanding as fast as the baseline assumed it would. Measure from a peak year rather than a typical year. Build in production-linked adjustments that automatically raise the limit when output grows. Each of these moves is defensible in isolation; together, they can hollow out a scheme entirely.
Australia's Safeguard Mechanism is an instructive case study. The policy, as described by the Australian government, sets emissions limits on industrial facilities emitting more than 100,000 tonnes of CO₂-equivalent per year, with baselines declining at 4.9% annually through 2030. That sounds like a ratchet. But the baselines are production-linked — a facility's limit is its output multiplied by an emissions-intensity value. Grow production, and your absolute emissions ceiling grows with it. The scheme targets intensity, not volume. Whether that translates into actual emissions reductions depends entirely on whether the intensity improvements outpace production growth. In a resource-exporting economy with expanding LNG capacity, that's not a trivial assumption.
This isn't a critique unique to Australia. It's the structural tension in virtually every output-adjusted carbon scheme: you're measuring efficiency, not impact.
The Corporate Version Is Worse
At the company level, the baseline problem compounds. Corporate net-zero pledges typically anchor to a base year the company selects. The choice of year matters enormously — a company that peaked emissions in 2019 and then saw operations contract during 2020-2021 can claim substantial "reductions" against a 2019 baseline while doing nothing structurally different. Scope 3 emissions — the supply chain and end-use categories that often represent the majority of a company's actual climate footprint — remain largely voluntary to measure and almost entirely voluntary to report accurately.
The Bloomberg carbon pricing piece is worth reading for what it doesn't say as much as what it does: rising carbon costs are a financial risk, but financial risk and actual emissions reduction are not the same thing. A company that passes carbon costs through to customers, or buys offsets of questionable quality, is managing its P&L exposure. It may not be reducing a ton of CO₂.
What the ETS2 Rollout Will Test
Europe's ETS2 expansion — covering buildings and transport, sectors that have historically been the hardest to price — will be the most significant real-world test of whether carbon pricing can work outside industrial facilities. The €86 billion Social Climate Fund is an acknowledgment that pricing these sectors hits lower-income households hardest and requires redistribution to be politically sustainable.
But the baseline question will arrive immediately. How will emissions limits for the buildings sector be set? Against what reference year? With what production adjustments for a sector where "output" is essentially heating and cooling square footage? The answers will determine whether ETS2 is a genuine emissions mechanism or an expensive revenue-raising exercise dressed in climate language.
Watch for the European Commission's technical implementation guidance on ETS2 baselines, expected ahead of the scheme's 2027 launch. That document — not the political announcement — is where the actual ambition level will be legible. If the baseline methodology allows intensity-based accounting with generous production adjustments, the €86 billion fund will be the headline and the loophole will be the fine print.
The math on climate pledges has always been easier to game than the math on actual atmospheric CO₂. The baseline is where that gap opens up.