Making the European Green Deal really work

Robert Schlögl, Christoph Schmidt 23 November 2020

a

A

Europe is always great when it comes to a grandiloquent rhetoric, but regarding climate policy, Europe’s record of actual achievements is mixed at best. This is not a consequence of a lack of ambition. Rather, the problem is that European policymakers seem to miss out on conceptual basics. Most importantly, the discussion of technical, regulatory, and economic aspects still widely fails to treat the energy system as an interdependent system which is embedded in complex global affairs, precluding the choice of system-wide optimal solutions. As – fortunately – climate policy becomes more ambitious, this deficiency grows in importance. To make the European Green Deal really work, three aspects are key.

First, emission reductions should by organised such that the least costly reductions are realised first. Thus, European policymakers should break away from their traditional compartmentalised thinking in terms of regional and sectoral contributions, and instead start seriously embracing the principle of division of labour in emission reductions. The key lies in separating the physical efforts of emission reduction from the question of shouldering the financial burden of these efforts. This would not require such a tremendous step. After all, for the industry and the energy sector, this is precisely what the European Emission Trading System (EU ETS) has been doing since its inception.

The EU ETS provides a uniform carbon price signal which pertains to all member states alike, aiming at a union-wide emission reduction objective. Its distributional implications are determined exclusively by the initial allocation of emission certificates. It would be most sensible to widen the scope of the EU ETS to cover mobility and heating as well and, in a parallel effort, to replace national targets with a single union-wide emission reduction target including these sectors. The EU Commission has indicated that it might consider broadening the scope of the EU ETS in the long term. This is not ambitious enough, since sticking to the compartmentalised approach for the time being threatens to waste enormous resources (Leopoldina, acatech, and Union of the German Academies of Sciences and Humanities 2020, GCEE 2019).

Second, European policymakers should not confuse objectives and instruments. It is undisputed that a low-emission energy system will be characterised by a large share of renewables and high energy efficiency. But while these two aspects are good yardsticks of the progress made towards climate neutrality, they are inadequate policy instruments. Stipulating a large share of renewables to be reached at a given point in time might prevent better alternatives to be chosen along the way, such as reducing demand for energy services. And stipulating efficiency standards decreases the cost of the corresponding energy services, thereby leading to increased demand for them according to the so-called rebound effect (Frondel et al. 2008).

Instead, it is much better to lower the attractiveness of fossil fuels by increasing their relative price. This steers the myriad of individual decisions of consumers and investors towards climate neutrality. Consequently, public expenditure on infrastructure investments and subsidy schemes should explicitly play the supporting role within the European Green Deal, while the starring role should be reserved for a uniform carbon pricing mechanism, ideally an encompassing EU ETS. This was also the unequivocal advice given by the German Academies of Science to the federal government at the start of the German EU presidency (Leopoldina, acatech, and Union of the German Academies of Sciences and Humanities 2020)

Using an encompassing and uniform carbon price as the principal coordination signal would confine the unavoidably enormous cost of the energy transition to a minimum, and it would retain a maximum amount of individual freedom of choice for consumers and investors, conditional on an uncompromised transition. Nevertheless, if not rectified by supporting measures, climate policy tends to entail harsh distributional consequences. Carbon prices make these consequences transparent, but other approaches suffer from the same problem. Actually, as the renewable surcharge on electricity prices in Germany demonstrates vividly, the most socially unbalanced climate policy is the clandestine redistribution from low-income to high-income households coming with its alternatives. Moreover, carbon pricing leads to public revenue which can be utilised to counteract any social imbalance by a redistribution to consumers and investors (Preuss et al. 2019)

Third, the EU should drop its naiveté about the strategic implications of its climate policy. Europe has relied on massive imports of fossil fuels in the past, and it will need to rely on massive imports of mineral resources and various forms of renewable energy in the future. Next to substantially enhancing its own renewable energy capacities, the EU will remain a large-scale importer of energy. A major policy strategy will thus be the formation of strategic partnerships with states, in the MENA region and elsewhere. This will take time and resources, and it will certainly entail similar unpleasant compromises across policy fields as the Realpolitik of the past.

Most importantly, the EU should address the overarching strategic problem of international coordination with a level-headed sense of realism. Ultimately, all European efforts need to coalesce into a global approach for the reduction of global emissions. Since the EU climate neutrality by itself cannot alter the course of global warming, given its limited share of worldwide greenhouse gas emissions, it is absolutely crucial that the EU tackles the issue in a way that makes the formation of a global alliance for climate protection, and especially for carbon pricing, more likely.

Currently, EU policymakers feel quite content in their pioneering role of aiming for climate neutrality. If they do not ask for enough reciprocal action in international climate negotiations, though, these efforts will amount to much less climate protection than the world would need. Again, it is crucial to distinguish between the question of where emissions are reduced and the question of who bears the costs. On the global scale, one possibility would be to reward emerging economies which join the EU ETS, with financial support for their economic development (Cramton et al. 2017, Ockenfels and Schmidt 2019)

While emphasising reciprocity in global negotiations, EU climate policy needs to lead by example. Whatever targets are stipulated, they should be reached effectively, efficiently, and in a socially balanced manner. Only then the EU could seek its particular role in global climate policy. 

References

German National Academy of Sciences Leopoldina, acatech – National Academy of Science and Engineering and Union of the German Academies of Sciences and Humanities (2020), “Energy transition 2030: Europe’s path to carbon neutrality”, Ad hoc Statement, Berlin, 9 November.

Cramton, P, A Ockenfels and S Stoft (2017), “An International Carbon-Price Commitment Promotes Cooperation”, Global Carbon Pricing 221.

Frondel, M, J Peters and C Vance (2008), “Identifying the rebound: evidence from a German household panel”, The Energy Journal 29(4): 145-163.

GCEE – German Council of Economic Experts (2019), “Setting out for a new climate policy”, Special Report, Wiesbaden.

Ockenfels, A and C M Schmidt (2019), “Die Mutter aller Kooperationsprobleme“, Zeitschrift für Wirtschaftspolitik 68(2): 122-130.

Preuss, M, W H Reuter and C M Schmidt (2019), “Verteilungswirkung einer CO₂-Bepreisung in Deutschland“, GCEE Working Paper 08/2019, Wiesbaden.

a

A

Topics:  Environment EU policies

Tags:  climate policy, European Green Deal, carbon pricing, climate neutrality

Director, Fritz Haber Institute, Max Planck Society and Max Planck Institute for Chemical Energy Conversion

President, RWI Essen and CEPR Research Fellow

Events

CEPR Policy Research