How to Meet the European Union’s Ambitious Climate Mitigation Goals
IMF Blog, September 24, 2020
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Bibliographic details
- Authors: Dora Iakova, Alfred Kammer, James Roaf
- Published: September 24, 2020
Overview
- By 2030, the European Union would aim to reduce greenhouse gas emissions by at least 55 percent below their 1990 levels.
- The final goal is for the EU to become climate neutral by 2050, as stated in the European Green Deal.
- To limit global warming to 1.5°C above pre-industrial levels, the whole world would need to become climate neutral by 2050; the EU is positioned as a leader.
- The cost of inaction is much greater than the cost of action.
- The recovery from the COVID-related recession offers an opportunity to advance the green transition while supporting economic recovery.
Road ahead
- Implementing a reduction of at least 55 percent by 2030 will require a major shift in the structure of the European economy toward greater reliance on renewable energy and higher energy efficiency.
- Two new IMF papers suggest a carefully designed package of policies would allow the EU to achieve its emission goals while maintaining dynamic growth.
- Careful sequencing of policies can support near-term economic recovery and long-term decarbonization.
Climate-friendly growth strategy
- Mobilize public resources at the country and EU level to build a sustainable and more resilient economy.
- Prioritize investments in green and digital technologies to deliver job-rich growth in the near term.
- Progressively increase carbon prices to generate revenues and incentivize investment in clean technologies and energy efficiency.
Policy elements (enumerated)
- A gradually increasing carbon price:
- A carbon price that covers all emissions and rises progressively over time is presented as the most efficient mechanism for cost-effective emissions reduction.
- Carbon pricing encourages reduced energy consumption and a shift to cleaner energy sources.
- The EU’s Emissions Trading System has been successful but coverage is currently limited to power generation and large industries; coverage should be expanded to all sectors.
- Strengthen price-signal predictability by establishing a gradually rising price floor for emissions permits.
- Current low commodity prices provide an opportunity to phase out remaining fossil fuel subsidies and tax exemptions.
- Use carbon pricing revenues to support sustainable growth:
- Revenues could be used to reduce (or avoid increasing) labor and other distortionary taxes, stimulate productive green investment, and support those affected by the green transition.
- With efficient resource use, the economic cost of climate policies is very low even in the near term.
- Over the long run, economic and health benefits from lower pollution, better air quality, and avoided environmental damages far exceed short-term costs.
- Support green investments and targeted nonprice policies:
- Carbon pricing alone is not sufficient to rapidly decarbonize sectors such as transport and buildings.
- Complementary policies address financing constraints, incomplete markets, and public-good availability.
- Governments can direct capital spending toward network infrastructure, including electric vehicle charging stations and power grids to support electrification and cleaner energy generation.
- Promote innovation in emerging technologies, such as hydrogen generation and new methods for carbon capture and storage.
- Ease financing constraints through measures like low-cost financing for energy-efficient renovations of buildings.
- Use nonprice policies such as feebates, standards, and regulations in specific areas.
- Ensure a just transition:
- Support households and workers most adversely affected by the move away from carbon-intensive activities.
- Support could include direct transfers to low-income households and training and job-placement help for workers.
- As carbon pricing coverage expands, low-income member states most affected by higher prices on emissions would need support.
- Prevent “carbon leakage” through global cooperation:
- The EU accounts for just 10 percent of global emissions and cannot stop global warming on its own.
- An agreement on a carbon pricing floor among major emitting countries would be the best way to reduce global emissions and prevent carbon leakage.
- In the absence of such an agreement, leakage could be prevented by applying the same carbon prices to the same products irrespective of where they are produced.
Key implications and conclusions
- The recovery effort from the current crisis provides an opportunity to accelerate the shift to a greener, sustainable, and fairer economy.
- A combined strategy of rising carbon prices, use of revenues for green growth, targeted nonprice policies, and measures to ensure fairness can enable the EU to meet its 2030 and 2050 goals while maintaining dynamic growth.
- The EU’s leadership can demonstrate to the world the benefits of shifting to a low-carbon economic model.
Dora Iakova, Alfred Kammer, James Roaf, September 24, 2020.