Carbon price: necessary, but not sufficient

In the run-up to the EU elections, German Environmental Minister Svenja Schulze has now said that she supports French President Macron’s climate plan, including a floor price for carbon. And Chancellor Merkel has now joined her in calling for “carbon net neutrality” by 2050. But the market can’t fix everything, says Craig Morris.

The discussion on CO2 pricing should take place in the light of already existing examples within Europe.

Could carbon pricing lead to a reduction in emissions? (Public Domain)

Recent #YellowVest protests against France’s new carbon tax have been misunderstood as proof that people will not accept such policies because they detrimentally affect the poor. But combining social and climate policy isn’t hard; it’s been done in plenty of countries, from Sweden to Germany and Canada. France simply didn’t do it.

How can we get this right, then? Easy – tax carbon, then redistribute the revenue equally across everyone, regardless of income. Since the rich generally consume more energy and emit more carbon, the result is wealth redistribution from top to bottom. Germany did this two decades ago with its Eco-Tax, which strangely is almost always overlooked in these debates. Like some other successful policies, the Eco-Tax set aside a small amount to fund renewables, but most of the revenue was just given back to people – in this case, to reduce payroll taxes.

The German policy is too small, and reducing payroll taxes leaves out freelancers and the unemployed, but the principle applied better elsewhere (like in Sweden and Canada) works well: offset other taxation with revenue from the carbon tax. Taxation experts speak of “revenue recycling” and even argue (PDF) that a well designed carbon tax can help reduce poverty.

But let’s not be market fetishists

While an effectively high carbon price is a must, it is not a silver bullet. Too many folks act as though a high carbon price would “let the market fix climate change.” So it’s important to understand what a carbon price can and cannot do. Let’s skip figuring out how high the price would have to be – that’s a blog post of its own – and focus on this overlooked part of the discussion.

A carbon floor price / tax can do a lot:

  • Facilitate fuels switch in power sector, say from coal to gas and then from gas to renewables
  • Encourage industry to invest in lower-carbon and zero-carbon technology
  • Nudge consumers to think about energy consumption whenever they buy, well, anything
  • Finally tax aviation

That list is not exhaustive. But the list of what a carbon price cannot do (without earmarking the revenue) is substantial as well:

  • Overcome the tenant/landlord dilemma that has plagued the building sector for decades: tenants save utility costs when buildings are weatherized, but landlords have to make the investments
  • Prevent urban sprawl
  • Ensure that EV charging infrastructure gets built
  • Ensure that EVs do not take over our streets, but that bike lanes are massively expanded
  • Improve and expand public transport
  • Make public transport safe so that woman and children use it all the time

A closer look at one dilemma not listed above – meat-eating – reveals further pitfalls. It is well known that beef in particular has a large carbon footprint. If a carbon tax covered meat production, beef etc. would get more expensive. Producers would come under pressure to lower prices – which is likely to come at the expense of these animals’ well-being. So a carbon price might require policy support to prevent it from making the already inacceptable animal husbandry conditions of current industrial farming even worse – and that’s an ethical debate.

Taken collectively, these items show that a carbon price is indispensable but also not enough on its own. Even when we have one that covers all sectors (European emissions trading currently covers only around half) and is also sufficiently high, we will still need policies that address issues that prices alone cannot reach.

And there’s the challenge: carbon pricing has become so popular among experts because it is a market mechanism that allows us to do without a public debate about ethics. Ethics makes us feel weird in these irreligious, individualistic times. Set the right price, and people can decide for themselves how to respond. Maybe you buy an EV, or maybe you move closer to work so you can cycle, walk, or take public transport. But these options can clash; self-driving cars are expected to draw people away from public transport, for instance. So your penchant for cars conflicts with my preference for trams.

The only way to resolve these issues is to accept that we must move beyond individualism and start community discussions. Ethics will be central – not so we can question each other’s morals, but so we can reach common ground on what our shared ethics are. What kind of world do my neighbors want to live in: one with detached homes and small front yards requiring cars, or compact people-centric (nor car-centric), walkable urbanity – even in small towns?


Craig Morris (@PPchef) is co-author of Energy Democracy, the first history of Germany’s Energiewende.

1 Comment

  1. James Wimberley says

    Good to see you back in the blogosphere!

    You leave out innovation. The dirigiste first EEG in Germany did a very good job in creating an environment for innovation, limiting the risks to both early consumers and early producers. Technical improvements in wind and solar depended on generous public support, in Japan, Germany, Denmark and the USA. The exception is electric cars, where innovation has SFIK largely been financed within the industry. But generally speaking, it’s reckless to rely just on a carbon price to create sufficient incentives.

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