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04/05/2020

A European Green Deal Under Pressure

Three questions to Christian Gollier

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Christian Gollier

Executive director of Toulouse School of Economics

In a matter of days, the health crisis has suspended everything that makes the strength of the European project. The absence of borders, budgetary discipline, free competition and the very idea of solidarity quickly faded in the face of urgent needs to fight the pandemic. What will remain of the European Union after the crisis? Considering the Green Deal may be challenged by the necessity to boost growth, economist Christian Gollier proposes a new European climate policy for the post-Covid era.

Christian Gollier is a Belgian economist. He is Head of the Toulouse School of Economics (TSE) which he co-founded with Nobel Prize winner Jean Tirole in 2007. His recent book, Le climat après la fin du mois (PUF 2019), deals with the urgency of acting on climate change and offers concrete economic solutions to preserve our common future. Christian Gollier is one of the main authors of the fourth and fifth reports of the Intergovernmental Panel on Climate Change (IPCC) and chairs the European Association of Environmental Economists (EAERE).

Since the outbreak of the pandemic, most factories have shut down, air traffic has collapsed, and many European cities are reporting unprecedented improvements in air quality. Is there a silver lining in the Covid-19 crisis for the fight against climate change and the protection of the environment?

The Covid-19 crisis will at least have a short-term beneficial effect since the fall in economic activity worldwide could result in an unprecedented 10% reduction in CO2 emissions for the year 2020. Nevertheless, this effect in Europe will be partially compensated by the very significant drop observed on the EU-ETS market for tradable emission permits, as it had been the case during the subprime and eurozone crisis. In regions of the world where quantity targets are pursued with a permit market, recessions have by design little effect on emissions. The demand drop for permits will be offset by the effect of this drop on the equilibrium price of CO2 on the market.

The fall in economic activity worldwide could result in an unprecedented 10% reduction in CO2 emissions for the year 2020.

This drop in the price of CO2 in Europe is unfounded, given the pandemic has not changed in any way the damage that our carbon dioxide emissions will impose on future generations. There is therefore no reason to lower our guard on the climate change front. Industrialists must be forced to integrate ecological damage into their decision-making process and a price for carbon equal to the present value of the damage that this carbon is causing must continue to be imposed, with or without coronavirus.

While the health crisis has meant the climate issue is taking a back seat, it has also shown that the European Union is able to put in place radically new measures. What measures would prevent the economic recovery from leading to an increase in CO2 emissions, as it did in 2009?

In view of the three financial, European and health crises, it is time for Europeans to change their climate policy software. Instead of pursuing a target in terms of quantity, such as a 40% reduction in emissions by 2030, the Union should set itself a target in terms of carbon price. A price starting at €50 per tonne of CO2, rising by 6% per year for the next 10 years, then 4% per year beyond that, seems desirable to me.

The massive fluctuations in the carbon price on the EU-ETS market are not good. Industrialists need predictability of future carbon prices to plan their energy transition, even if perfect predictability is impossible given the consequent uncertainties surrounding the modalities of the transition. For the time being, I support a proposal to tinker with the EU-ETS by adding a floor price of €30 per tonne of CO2. This would create a hybrid system combining an emissions reduction target with an objective of internalising the value of climate damage.

Last December, the European Commission presented a New Green Pact, designed as a growth strategy for a low-carbon Europe. How can we integrate the CO2 emissions reduction goal initially set out in the Green Deal in the economic recovery plans that will follow in the wake of the crisis?

Once the health crisis has passed, we must accept that the European climate policy needs a re-think. The Green Deal that was being developed before the pandemic is likely doomed. The significant increase in sovereign debt in the Union and the rest of the world will constrain public spending for years to come. The financial capacity of states to subsidise a transition is thus weakened. This type of action would be limited to financing public infrastructure necessary to the coordination of private action, households and businesses. We have to be honest and recognize public support for private transition efforts is forfeited.

This reinforces the need to coordinate the myriad of individual efforts through carbon pricing, with a price target for the next 30 years announced today. The credibility of this carbon price chronicle is crucial. This is why, along with Jacques Delpla, director of the Asterion think tank, I recommend that this responsibility be delegated to an independent body that we name the Central Carbon Bank (BCC).

Once the health crisis has passed, we must accept that the European climate policy needs a re-think.

This health crisis is being superimposed on an oil counter-shock of astonishing virulence. It is commonly presented as a concerted action by OPEC and Russia to annihilate marginal oil producers, in particular American shale oil. It could also be interpreted as a strategy from oil countries to sell off their reserves before it is too late meaning before renewable energies overwhelm consumer countries. This "green paradox" requires a strong reaction from the latter, which should compensate for the fall in the price of fossil fuels on their soil by increasing the price of carbon. That is why I am proposing to raise the price of carbon to €50 per tonne of CO2 as of today. If we do not do this, we risk a strong return of gas and coal to the European energy mix.

COPYRIGHT : JOHN THYS / AFP

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