Climate mitigation

The picture shows a blue sky and rising emissions.

If Europe wants to succeed with the Paris Climate Agreement, it has to extend the European Emissions Trading Scheme to all sectors and greenhouse gases.

09.07.2019 · Economics, Social Sciences, Spatial Research · Kiel Institute for the World Economy · News · Research result

The Kiel Institute demands comprehensive climate policy reforms from Germany and Europe to get its greenhouse gas emission development on track with emission reductions required for achieving Paris Climate Agreement. The goal must be to extend the European Emissions Trading Scheme (EU ETS) to all sectors and greenhouse gases. A realistic way to achieve this could be a multi-stage procedure, starting with national solutions and a separate emissions trading system for sectors not yet covered. Competitive disadvantages against non-European countries could be avoided through border adjustment measures.

The Kiel Institute for the World Economy is proposing a three-stage procedure. First, those CO2 emissions currently not covered by EU ETS like for example from transport and buildings, should be regulated as part of new, national emissions trading schemes.  Such schemes should be launched by Germany and other willing countries. Second, these national non-EU-ETS emission trading schemes should be extended to all EU countries with intra-country trading in the medium term. Third, both layers of emissions trading schemes should be vertically integrated to achieve a comprehensive EU ETS.

"This three-stage procedure is a realistic way to cover all European sectors and greenhouse gases through emissions trading in the long term, because it allows a gradual alignment of the CO2 abatement costs of the various sectors and thus prevents a sharp increase in the price of allowances in the EU ETS. At the same time, it takes into account concerns related to European law and the political economy", said Gabriel Felbermayr, President of Kiel Institute and co-author of the paper "Für ein duales System der CO2-Bepreisung in Deutschland und Europa", which appeared today in the Kiel Focus series. Achieving a comprehensive EU ETS would be essential for making progress against the climate goals of Paris, i.e. to keep the average global temperature rise well below 2 degrees above pre-industrial levels and to make efforts to limit the temperature rise to 1.5°C above pre-industrial levels.

Submit imports to domestic CO2 pricing

According to the authors, the earnings from the auction of CO2 emission permits in the national emission trading schemes should be used to reduce domestic electricity taxes and for the case of Germany in particular to reduce the renewable-energy levy (EEG) on electricity consumption which is used to finance the feed-in tariffs for renewables. Furthermore,  a part of the earnings should be used for a lump sum payment to citizen, i.e. a carbon dividend. Thus the social compatibility of the system is guaranteed.

Border carbon adjustments would be necessary to exempt exports from and submit import to European CO2 pricing, respectively. Otherwise, European producers would face a competitive disadvantages, potentially relocating production abroad while at the same time European products could be increasingly substituted by non-European products which are not covered by CO2 pricing schemes.. Both would counteract domestic emission reductions while border tax adjustment provide incentives for non-European countries to also establish CO2 pricing schemes.

A prerequisite for border carbon adjustment is the exact determination of the CO2 content of imports and exports. This could be achieved through a mechanism that encourages importers and exporters to disclose the actual CO2 content of their products in order to save costs.

Climate policy in Germany so far inefficient and expensive

The authors describe Germany's current climate policy as being so far inefficient and unnecessarily expensive because there is a juxtaposition of different instruments that imply different CO2 prices. The German energy system transformation is associated with very high costs and the electricity price in Germany is one of the highest in the OECD, both in the private and industrial sectors. If Germany does not take further measures, it will not be able to meet its climate commitments to the EU, according to the authors.

"To even come close to achieving the goals of the Paris Climate Change Agreement, considerable global efforts are needed. Europe, and Germany in particular, are particularly challenged here: on the one hand because of the historical responsibility - the cumulative CO2 emissions of the EU are still higher than the cumulative CO2 emissions of China and India combined - and on the other because of the technological and financial challenges that are both an opportunity and a threat," said Felbermayr.

More information and contact

www.ifw-kiel.de