Fuest and Pisani-Ferry Favor Financing the EU via Emissions Trading

The EU should receive a new source of funding in the form of revenue from the European emissions trading system (ETS). This is a proposal from Clemens Fuest, President of the ifo Institute and Speaker of the EconPol Europe research network, and Jean Pisani-Ferry, French economist and former Founding Director of the Bruegel think tank. Their joint paper will be presented to the EU Economic and Financial Affairs Council (ECOFIN) in Berlin on Friday. They recommend that revenue from the ETS be used to finance the EU fund for economic recovery (Next Generation EU), which was adopted in July.

CO₂ emitted by economic sectors causes damage across borders, so it would make sense to let the proceeds from emissions trading flow into the EU budget. With a single climate protection target for the whole EU, implemented through a pan-European system for trading emission allowances which should be extended to all sectors, it no longer makes sense to allocate the revenue from the sale of those allowances to individual member states. “Revenue from the ETS is suitable as EU-governed resources because of its special characteristics. At the same time, it has the potential to generate sufficiently high amounts,” the authors write. Emissions revenue will decline as the EU nears its goal of climate neutrality, but for the transitional period, the revenue could be used to pay off debt from the EU’s economic recovery fund. According to estimates, the ETS could generate between EUR 800 and 1,500 billion in revenue by 2050. The EU’s coronavirus aid package is worth EUR 750 billion, of which EUR 390 billion will be transfers and the rest will be loans; the transfers could be paid for by ETS revenue.

Up to now, the contributions of the member states to the EU budget have been based primarily on the states’ gross national income. These contributions would be reduced and partly replaced by ETS revenue. In turn, this would shift the distribution of the financial burden among member states. Countries with a lot of fossil energy, like Poland, would pay more, while others, like France, would pay considerably less. The authors propose a transitional rule that limits these redistribution effects.

The arguments for other sources to fund the EU’s own resources are less convincing, the two researchers added. For example, they feel that the international discussion on digital taxes would be better placed within the OECD reform process for corporate taxation. And from an economic point of view, the financial transaction tax is controversial. Only a minority of the member states want to introduce it, so it is not particularly suitable as a basis for resources for the EU as a whole.