There must be a vigorous reallocation of capital in our economies if we are to achieve a green transformation quickly enough to meet our responsibility to future generations. Instead of attempting to achieve this through national planning administered by states, Christian Gollier, Managing Director of the Toulouse School of Economics, proposes to set a unique carbon price, sufficiently high, increasing over time, coupled with a strategy of large-scale support for green Research and Development (R&D).
Europe has set itself the ambitious goal of reaching carbon neutrality within the next three decades. While no-one today can say what our economy will look like in that context, it is clear that if we are to get there, we have to embrace profound changes in our way of life, and changes to the structure of capital in our economy (industry, infrastructure, housing and transport). In 2018, the European Commission estimated that achieving this change would require between €175 and €290 billion in additional investment in Europe each year between 2030 and 2050. Even though part of this change will come through necessary public sector investments, most of the burden - which will severely affect households’ purchasing power - will be carried by the private sector and transferred to consumers through increases in the relative prices of energy-intensive goods and services. Until the discovery of a technological miracle that will make it possible to produce renewable energy at a lower cost than fossil fuels, for the good of future generations, these sacrifices are unavoidable. We should make sure that these sacrifices are minimized for the given EU climate ambition. For this, the best climate policy is to reorient the allocation of capital in our economies toward low-carbon technologies through a carbon price that increases over time, and that is set at a level that matches the EU’s ambitious climate objectives.
Reforming the EU Emissions Trading System (ETS) market
What is the most effective way to orchestrate this transition, in other words, to implement it at the lowest cost to European citizens? First of all, it is important to note that the management of this key issue should be made at the European level, both for our collective prosperity and for the global common good that is our climate. What is more, following the approach taken in the photovoltaic and hydrogen sectors and resorting to a climate race-to-the-bottom, or green national champion one-upmanship, would spell disaster.
The size of the European recovery plan might lead us to believe that only states are in a position to make these investments, for example by piloting and financing investment plans in target sectors. This suggests that European politicians are operating on the assumption that if the ecological transition is slow, it is because green entrepreneurs aren’t able to access sufficient credit in the markets. But there is no basis for such a conclusion. The level of interest rates across Europe and the amount of liquidity in the financial markets suggest an altogether different state of affairs. The fact is that there are myriad green projects on the continent. Many of them are socially desirable to implement, but they remain unprofitable when compared to their more carbon-intensive competitors. The problem European climate policy has to solve is not that the green sector does not have enough access to capital. Rather, it is that the many green businesses are not competitive.