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  • The Carbon Dividend:
    Europe's Winning Card

    Policy Paper -
    JUNE 2020
Author
Eric Chaney Economic Advisor of Institut Montaigne

Eric Chaney is the economic advisor of Institut Montaigne. He is also president of his company ECho, through which he advises multiple financial and non-financial companies on economic and geopolitical issues.

Covid-19 brought the world to a halt. During this period where economic activity was largely suspended, worldwide reflections began about how to better the course of our future. As global levels of carbon dioxide emissions declined, the need for a sustainable economy has become clearer than ever.

The Green Deal of the European Commission, put forth on December 11, 2019, has set forth a number of concrete and important actions that need to be taken in order to achieve European net-zero carbon emissions before 2050. The only caveat: this plan was drawn before the Covid-19 crisis.

Did our fight against climate change take into account a global economic recession? No, clearly. But does saving our economy mean we have to forego our planet? Absolutely not.

The fact of the matter is that global economic activity was turned on its head over the course of just a few months. The economic recession we are facing leaves us with little choice but to find the best possible use of public money. The opportunity, thus, presents itself to pave the way for a recovery plan that is both economically viable and environmentally sustainable. Taking the current context into account, this policy paper argues that the sure path towards this dual objective is through one particular component of the Green Deal: carbon pricing.

European countries are among the most likely to reach the objectives set by the Paris Agreement: EU members have almost all (with the exception of Poland) renewed their goal of carbon neutrality by 2050. A 23% decrease in emissions since the 1990s goes to show that results can be achieved when States follow through and take action. However, at this stage, the 2050 objective is still out of reach, and much still needs to be done.

This policy paper aims to look into how the European Union could lead the world towards decarbonization, by relying on the mechanism of carbon pricing. The aim would be to ensure an integral and decentralized redistribution of the carbon dividend. The green transition can sustain the economy while at the same being equitable.

The necessary price for carbon

In order to transform behaviours and modes of production, one of the most efficient  (and least costly) strategies is to impose a unique, sufficiently high price on carbon which can increase over time. The aim would be to make goods and services more expensive, thereby compensating for the future damages caused by their carbon content. Carbon pricing is an increasingly popular policy at the global level and is, among others, one of the tools listed by the European Commission’s Green Deal. The urgency of our situation calls for the utilization of the best tool available, to rapidly overcome the current context.

 

Per capita CO2 emissions are falling in industrialized countries, but not in the world overall

 

It is crucial for the EU to drastically reduce emissions as soon as possible, and to think about ways to offset the current stock of greenhouse gas. Any plausible scenario includes increasing Asian and African emissions, due to both economic and demographic factors. On the other hand, a vast majority of the 27 members of the EU, to which the United Kingdom must be added, have reaffirmed their goal of reaching carbon neutrality by 2050, though they failed to indicate how they would concretely do so.

 

A European citizen produces on average 50% less CO2 than an American, and 42% more than a Chinese citizen

 

The task is certainly daunting, but the potential achievement is far greater. If the 27 countries agree on a high carbon price trajectory, they would have to apply it to both domestic products and imports, thus creating a large "carbon dividend". The European Union would then have a powerful argument to convince its trading partners to follow the same path, thereby creating a "climate club", as the economist William Nordhaus, winner of the Nobel Prize for Economics in 2018, would recommend. Today, only the European Union is in a position to implement this, because it is politically mature and large enough to do so.

How could we go about the carbon dividend?

It is clear, beyond any reasonable doubt, that the increase of greenhouse gases (GHGs) in the atmosphere and oceans is the main cause of ongoing climate change and environmental damage. This will only accelerate in the coming decades, as the current concentrations have already passed the damage threshold. If the stock of GHGs (mainly CO2, which has a long cycle) is not quickly stabilized in the atmosphere, the consequences for future generations will be dramatic.

From this point of view, it seems encouraging that per capita CO2 emissions have been declining for the past ten years in the United States and the European Union, and have stabilised in China. But while the reversal of the trend is good news, we are still a long way from achieving the goal of limiting the increase in the global average temperature to less than 2°C.

This policy paper primarily focuses on the reduction of CO2 emissions. Proposals destined to tackle CO2 issues may also apply to other greenhouse gases (GHGs), starting with methane. The author of the paper notably argues for:

  • The creation of a Carbon Agency for the European Union (CAEU), which states would entrust with the mission of determining the most coherent trajectory for the carbon price, with the aim of reaching carbon neutrality by 2050.
     
  • In parallel, this policy paper aims to introduce a fee adjustment in EU borders, by introducing a tax on the carbon content of imported goods and services. It also aims to redistribute the bulk of the carbon dividend to households on a national scale, taking into account the specificity of the different member states in terms of per capita income, but also the share of domestic fossil resources in the national energy mix.
     
  • Lastly, this paper encourages the EU to push for the creation of a "climate club" with its trading partners. The EU’s trading partners that would enter this club would have to follow a similar carbon price trajectory, and would in return be exempt from any carbon taxation. By contrast, countries that would fail to participate in such a club would see their exports towards member states be subject to a tax.
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