Europe: Climate Neutral by 2050
From the Paris Agreement and Fridays for Future to the recent amendment of the German Climate Change Act and the European Commission’s “Fit for 55” package: the international community, supranational organizations, national policymakers, and social movements are increasingly turning their attention directly to climate change. Fit for 55 raises the EU’s 2030 target for greenhouse gas emissions reductions by 15 percentage points to at least 55 percent compared to 1990 levels. In Germany, the amendment of the Climate Change Act in 2021 also raises the country’s 2030 target for carbon emissions reductions – by 10 percentage points to at least 65 percent compared to 1990 levels. By reducing its carbon emissions, Europe is aiming to become climate neutral by 2050. The 35th ifo and FAZ Economists Panel looks at the individual components of the EU’s Green New Deal, proposals for a greening of the ECB’s monetary policy, and climate action measures in Germany. A total of 171 professors at German-speaking universities participated.
Many Economists Call for More Muscular European Climate Policy
A good two-fifths of the participating economists state that the EU should do more to protect the climate. They say that the measures currently in place are not enough to achieve the EU’s self-imposed reduction targets. Climate policy needs to be effective because the costs of unchecked climate change are too high. Moreover, the only way to make climate policy truly effective is by strengthening it at the supranational level. A good quarter of economists, on the other hand, consider the EU’s current climate policy to be appropriate, pointing to the EU’s Green New Deal. At the same time, however, they argue that the EU’s institutional role imposes certain limits on the bloc’s ability to act. One-fifth of participants believe that the EU’s current climate policy is already too extensive and that it should undertake less in the way of climate action. They cite the lack of effectiveness of the measures currently being taken, but also the need for climate policy to be global and not just European.
Majority of Economists Favor Expanding EU Emissions Trading to Cover Transport and Heating
Almost 70 percent of the participating economists believe that emissions from transport and heating should be priced and integrated into the existing EU Emissions Trading System. This would be the most efficient approach, since a comprehensive and uniform trading system can minimize distortions and make cost-optimum abatement decisions. Only 17 percent favor a parallel system to ease the transition into pricing and to have more flexibility in dealing with existing uncertainties surrounding how to include these sectors. A good 5 percent are in favor of pricing at the national level. Only 2 percent believe that emissions from transport and heating should not be priced and traded.
Economists Divided on the Issue of the Effort Sharing Regulation
Of the participating economists, 41 percent believe that national reduction targets should be retained for emissions not covered by the EU Emissions Trading System. This contrasts with the 45 percent who think this doesn’t make sense. The argument in favor of retaining the targets is that they can be adapted to each country’s specific conditions and thus help achieve CO2 savings even in the absence of a uniform supranational solution. In contrast, some participants argue that having different abatement targets is less efficient due to the lack of uniformity. This could lead to substitution between countries, while the existence of multiple regulations could increase the cost of climate policy without providing greater benefits.
Economists Oppose a Combination of Climate Policy Instruments for Road Transport
Almost 50 percent of the participating economists are against simultaneously integrating road transport into the EU Emissions Trading System and tightening fleet emissions standards. They justify this on the basis of negative interactions between the two measures. In addition, some economists generally oppose fleet emissions standards, arguing that they are inefficient, paternalistic, and do not achieve their goals. Around two-fifths of the participating economists consider the combination of emissions trading and fleet emissions standards for road transport to be sensible, saying this would send an effective signal to the automotive industry – against the combustion engine. They also argue that this makes the measure more binding on manufacturers and that the fleet emissions standards could accelerate the effect of the measure.
Economists Convinced by the European Commission’s Carbon Border Adjustment Mechanism
Nearly half of the participating economists are in favor of a carbon border adjustment mechanism to prevent carbon leakage. The introduction of this system would eliminate the current free allocation of allowances to vulnerable industries. Arguments for the switch go in two directions: First, some economists argue against the current system of free allocation due to its inherent inefficiency. Second, many are in favor of a carbon border adjustment because it would level the international playing field while encouraging manufacturing not to abandon Europe for CO₂-related reasons. Furthermore, proponents also see positive external effects, as the mechanism would create incentives for countries outside the EU to introduce national carbon standards. Only 9 percent are in favor of the free allocation system, saying they doubt the effectiveness of carbon border adjustments and fear increased protectionism. The 7 percent of participating economists who are generally against measures to protect against carbon leakage argue similarly. Some 8 percent of the participating economists present alternative measures that the European Commission could use to protect against carbon leakage, such as international agreements and negotiations.
Economists Oppose Carbon Pricing at the National and Supranational Level
More than half of the participating economists believe that carbon prices should be introduced at the supranational level to replace national prices. This contrasts with two-fifths of the participants, who are in favor of the dual system. Of this group, 95 percent favor netting national carbon prices against supranational prices. Around half of those who favor netting also call for an increase in the national carbon price to meet ambitious reduction targets. The other half – i.e., about one-fifth of the participating economists – call only for nettability.
Reimbursement of Carbon Pricing Revenue as a Per Capita Lump Sum Most Popular among Economists
The participating economists disagree on what to do with the revenue from carbon pricing. Around half call for it to be returned to citizens as a per capita lump sum. A good third want to reduce or abolish Germany’s EEG surcharge, thereby reducing the price of electricity. A repeal of the energy and electricity tax, which is supported by 23 percent of the participating economists, would also bring electricity prices down. Meanwhile, just under one-third suggest using the revenue from carbon pricing to promote climate-friendly technologies. Nearly 20 percent would like to reduce non-energy-related taxes and surcharges, while 2 percent of the participating economists oppose reimbursements of any kind.
Economists against Tightening of Sector-Specific Regulations
The German government has only recently tightened its climate targets. One way to achieve them would be through regulations in individual sectors, with legislators introducing energy efficiency and emissions standards. However, half of the participating economists would like to do without stricter sector-specific regulations. This contrasts with almost 40 percent who support tighter regulation of individual sectors. The participating economists most frequently mention agriculture (29 percent), followed by transport (27 percent) and buildings (24 percent). Next come energy (18 percent), manufacturing (17 percent), and waste management (16 percent).
Economists Favor Additional Sector-Specific Investments
In addition to new regulations in each sector, the government also has the option to invest more in each sector to meet climate goals. A good quarter of the participating economists think this is a bad idea. They voted not to invest in any sector. More than half of the participating economists named specific sectors in which they would like to see more investment: buildings (35 percent) and transport (33 percent) are economists’ top two choices. These are followed by energy (31 percent), manufacturing (21 percent), and agriculture (20 percent). Waste management (12 percent) brings up the rear.
Economists against Sector-Specific Carbon Reduction Targets
In its Climate Change Act, the German government set precise carbon reduction targets in each sector for each year until 2030. The reduction targets applicable to the period from 2031 to 2040 are to be announced in 2024. A majority of the participating economists (60 percent) take a critical view of sector-specific reduction targets due to their inherent inefficiency: it should be left to the market to decide where the most carbon can be saved. Moreover, it makes no difference to the climate which sector the emissions originate from. In contrast, 30 percent of the participating economists consider defined carbon reduction targets for individual sectors to be the right way forward. The argument in favor of stronger regulation is that otherwise simply not enough will be done. In addition, it means the individual sectors would be unable to relinquish responsibility in the event of targets being missed.
Economists against Climate Action Mandate for the ECB
By 2050, the EU wants to be climate neutral. This might involve expanding the ECB’s mandate to include climate policy objectives. However, a clear majority of 80 percent of the participating economists are against this proposal. Most of the economists believe that the ECB should focus solely on monetary policy. They add that climate action is outside the bank’s mandate and that it has no democratic legitimacy for such a task. Only 14 percent think this is a good idea. The most frequently cited reason for involving the ECB in climate policy is that time is running out for humanity and therefore any measure is justified.
Corporate Sector Purchase Program (CSPP)
Within its current mandate, the ECB has a program for purchasing corporate securities. In this respect, the ECB could become active in climate policy by preferentially buying bonds issued by low-emission companies. This proposal was rejected by 70 percent of the economists surveyed. Meanwhile, 23 percent think it is a good idea and 7 percent state that they have no opinion on this. The argument most frequently cited by those who support this proposal is its direct and predictable additional effect: it creates a further incentive to invest in a climate-friendly way. The most frequently cited reason not to support this proposal is neutrality: the ECB would then no longer be acting neutrally, but politically. Moreover, the ECB already has enough on its plate dealing with monetary policy. Bond purchase programs should be reduced rather than used for political purposes.
Europe: Climate Neutral by 2050?
ifo Institut, München, 2021
ifo Schnelldienst, 2021, 74, Nr. 10, 66-70
