Few countries have climate targets more ambitious than those of the EU. At the same time, the EU is challenged by persistently low economic growth — often described as a problem of weakened competitiveness.
The question is whether climate policy can be improved so that it hampers economic growth less, or whether climate policy can even improve growth rates. The answers to the two questions are yes and no, respectively.
Green industrial policy is a dangerous mirage. Unfortunately, the belief has spread that aggressive industrial policy can be designed to deliver almost exclusively such benefits: lower greenhouse gas emissions and higher growth. The message is politically tempting, but wrong and risky. It could easily make Europe’s growth problems worse.
The reality is that climate policy comes with a net cost. Otherwise, there would have been no climate problem in the first place. Countries and companies would be competing to solve the climate problem simply to reap the direct gains. Climate change would not be the free-rider problem it is.
The benefits of lower temperature increases are global. The costs of combating climate change fall on individual countries or individual companies. Neither the theory behind active industrial policy nor the practical experience with it is encouraging. Imposing additional green constraints will only reduce the already poor prospects of success further.
Similarly, it is an illusion that the EU can solve its problem of high energy costs by subsidizing renewable energy. The cost of subsidies, backup and storage and the instability of supply must be counted as parts of total costs — not only the direct electricity price when the sun is shining and the wind is blowing.
”"While climate change is far from a gift from heaven that can make us richer, there is considerable potential to reduce the costs of the green transition — in other words, to make us less poor."
While climate change is far from a gift from heaven that can make us richer, there is considerable potential to reduce the costs of the green transition — in other words, to make us less poor. The costs are, of course, not an argument for doing nothing about the climate problem. Unnecessary costs, however, are difficult to justify. In the long run, one should expect that the higher the price of the green transition, the less of it there will be.
The basic principle of cost-effective climate policy is to set a uniform price on greenhouse gas emissions across sectors and EU countries. This will allow decentralized market forces to eliminate the emissions that can be reduced at the lowest cost. In the EU, there is a uniform price in ETS1, which covers power plants, industry, aviation and maritime transport. The solution is to expand ETS1 to cover as many emissions as possible and to link the price of emissions in the remaining non-ETS sectors to the allowance price. In the long run, national burden-sharing requirements should be scrapped altogether, just as member states should avoid additional national targets on top of the EU-wide emissions cap.
A green transition driven by direct regulation — command and control — and subsidies for, for example, renewable energy is not cost-effective. Pricing provides a large indirect subsidy for producing clean energy and leaves it to the market to phase out the least necessary emissions. Technical standards and technology bans — for example, on conventional cars — ignore differences in abatement costs.
The costs of reducing greenhouse gas emissions cannot be assessed independently of the damage caused by greenhouse gases. Ideally, there would be a global CO2e price equal to that damage. The current allowance price in ETS1 is within the range of the social cost of carbon, but the relevant marginal carbon price still differs considerably across sectors and member states, due to regulations and national taxes.
The EU accounts for far less than 10 percent of global greenhouse gas emissions. EU climate policy will therefore play a limited role unless it is designed with this reality in mind. First, the EU should ensure that there is an element of reciprocity and should not move ahead unconditionally. Second, the EU should focus strongly on cost-effectiveness. Expensive and inefficient climate policy may deter other countries rather than inspire them to reduce emissions.
Admittedly, climate and growth are not the only considerations in energy policy. Security has become a pressing concern. But we should be careful not to let security become a magic word that opens the door to bad policy — just as the growth problem should not open the door to active industrial policy.
A policy that compromises growth in the name of security will ultimately undermine the most important precondition for security policy: a high level of prosperity that can be mobilized to deal with known and unknown threats as they materialize.
Otto Brøns-Petersen
Director of Analysis
Center for Political Studies (CEPOS)
Denmark
