A Master Plan for Climate Policy

Joint proposal by Gabriel Felbermayr, Clemens Fuest and Jens Südekum
Gabriel Felbermayr (WIFO, Vienna), Clemens Fuest (ifo Institute, Munich), and Jens Südekum (University of Düsseldorf) have proposed an EU climate plan on 21 October 2021. "There is no way around a uniform carbon price across sectors, for example as part of the European emissions trading system (ETS)."

"Such a price creates the best incentives for private households to adjust their behaviour and for companies to conduct climate-friendly business. Carbon prices are the central instrument of climate policy", the three researchers write in an article for ifo Schnelldienst.

However, government revenue from the carbon price ought to be returned to the general public in full, either directly as a climate premium or through a reduction in electricity prices, achieved for example by abolishing the EEG levy. This would further reinforce the incentive effect of carbon prices. Under no circumstances should the revenue from the carbon price be earmarked for other purposes. Otherwise, high energy prices might pose a divisive threat to society. It is essential to ensure that behavioural adjustments to high carbon prices are possible in the first place. Where there are no buses, people cannot do without their cars. Where there are no recharging points, electric cars will not catch on, as the three researchers point out.

What's more, the EU should not be "naive when it comes to industrial policy". The total quantity of certificates permitted in EU emissions trading would have to be greatly reduced if climate targets are to be achieved. Industry won't continue to receive free allocations of certificates forever, the authors write, which is why certificates will soon become considerably more expensive. This will lead to a cost shock for European industry, but not for competitors from other regions of the world. It is true that the "stick" of higher carbon prices is indispensable. "But we also need "carrots" in the form of green subsidies. We need to enable European industry to implement green investments, even in this difficult market environment. This is the only way Europe can simultaneously meet climate targets, become or remain the world leader in green technology, and thus maintain jobs and prosperity."

The funding needed for this climate master plan will be significant, but "climate action is the grand project of the 2020s", the authors write. The argument that this area requires a huge amount of financing cannot be a reason for not taking on these tasks. One obvious course of action is to take country-specific funding requirements into account as part of the forthcoming reforms to the fiscal rules for the Stability and Growth Pact. The goal is to establish a consistent and adequately funded overall concept for climate policy in Europe.

The full article for the ifo Schnelldienst is available here.