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The long-term strategy to make the EU carbon neutral needs a hard reality check ǀ View

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The gap between EU policies and goals for reducing greenhouse gas (GHG) emissions is becoming increasingly wide and new solutions are urgently needed to close it. The gap will grow further if the European Commission amends its 2050 target to strive for climate neutrality, a move proposed in the long-term strategy developed by the European Commission in 2018 and reinforced by Ursula von der Leyen, President-elect of the European Commission, in her European Green Deal.

If we are to take the Paris Agreement seriously and prevent the average global temperature rising by more than 1.5° Celsius, we need to reduce global net GHG emissions to zero by 2050. The EU’s current target is a reduction of emissions by 80-95% by 2050. However, the EU itself estimates it will only achieve about 60% with a continuation of current policies. In 2017, GHG emissions rose after falling by almost 23% between 1990 and 2016.

The Commission’s strategy identifies seven fields in which action must be taken to close the gap: energy efficiency, (renewable) energies and electricity, mobility, industry and circular economy, network development, bio-economy and CO2 sinks, and CO2 capture and storage. Yet the paper fails to set out any concrete measures as to how to achieve a higher reduction. If there is to be a chance of carbon neutrality by 2050, a long-term framework must be put in place, and fast. Is this hope realistic?

The most important instrument the EU has in regulating member states’ emissions is the European Emissions Trading Scheme (EU ETS). The EU ETS regulates almost half of the European GHG emissions, including those from the electricity sector and a number of other energy-intensive industries.

Emissions trading, like all other climate policies, has until now been geared towards achieving a 40% overall emission reduction by 2030. If the long-term targets were to be tightened, this target would also have to be reviewed. Von der Leyen has suggested the 2030 target should be increased to 50% or even 55%. Although individual countries are already aiming for higher emission reduction by 2030, this upscaling is bound to be met with resistance by some member states.

In this context, it is especially problematic that existing regulations which hamper transformation and reduce investment incentives, such as distortions through existing national taxes and duties, are often not within the reach of the EU. Here, the EU depends on the cooperation of member states.

Moreover, around half of European emissions (including traffic and heat) are not included in the EU ETS (non-EU ETS sectors). In these sectors, the EU is relatively restricted in terms of new direct regulation through price signals, as the levying of EU-wide taxes must be unanimously adopted.

The Governance of the Energy Union and Climate Action in 2018 was an important step in strengthening long-term planning of emission reductions in non-EU ETS sectors. Yet, adjusting the underlying national targets for 2030 will be a tedious process with a uncertain outcome.

Establishing comprehensive carbon pricing in the EU?

Despite the problems in getting all member states on board, the basis for a long-term decarbonisation framework should be the general and comprehensive reflection of GHG-related damages in the prices of goods and services. This creates the necessary conditions for efficient climate protection efforts in the seven fields of activity mentioned in the strategy paper.

To establish a comprehensive price system for GHG emissions, a distinction should be made between measures that have a realistic chance of implementation in the short-term, and measures which appear implementable only in the medium-term. Reforming the EU ETS to integrate emissions that are so far not included does not seem to be achievable at short notice.

Nonetheless, integration of non-EU ETS emissions should remain the strategic policy focus. It provides the opportunity to directly control the emission reduction path and to tighten emission targets relatively easily.

The idea of including other sectors, such as transport, in emissions trading is not new. In the EU, however, it remains contested as to whether this integration complies with the definition of relevant emission sources in the Emissions Trading Directive. An adaptation of the corresponding definition may be required before such an integration were feasible. Yet, with the most recent reform of the EU ETS having been carried out just one year ago, further reform cannot realistically be expected soon.

In the meantime, we need national solutions (or strategic alliances of ‘willing’ member states) to establish general CO2 prices in the non-EU ETS sectors. These could either come in the form of CO2 taxes or emission trading systems.

Both of these solutions comes with pros and cons. While CO2 taxes seem to be easier to implement in the short term, their introduction could create a regulatory lock-in. Transitioning from a national tax to an integrated EU ETS is likely to be more difficult politically than transitioning from a national to a European ETS. If reduction targets are not met, discretionary adjustments of the tax rate become necessary. This might not only prove to be politically difficult but also create price uncertainty for investors.

Whichever type of unilateral CO2 price is chosen, for it to be fully effective, its introduction should be accompanied by reforms of existing national fuel-specific or even sector-specific energy taxes. However, given the political persistence of taxes, such reforms might be easier said than done.

All these obstacles will be hard to overcome without additional incentives for reform. To this end, the EU should consider expanding the strategic use of transfer payments, a solution which may not require additional financial means.

Reallocating endowments of emission permits or “greening” European Structural and Investment Funds can be revenue neutral. Whether its distributional implications are easier to overcome than resistance against raising additional funds (as needed for von der Leyen’s Climate Bank), remains to be seen.

At present, a certain signaling effect can certainly be attributed to proclaiming the goal of a climate-neutral Europe, yet its implementation still raises more questions than answers. But, as Theodore Roosevelt stated: "Nothing in this world is worth having or worth doing unless it means effort, pain, difficulty.”

Prof. Dr Karen Pittel is a researcher with the EconPol Europe network, director of the ifo Center for Energy, Climate and Resources, and professor of economics at the University of Munich, specialising in energy, climate and exhaustible natural resources

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