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Why the EU’s proposed carbon border levy is an important test for global action on climate change
(The Conversation, 1 Feb 2021) In the more than two decades since the Kyoto Protocol was adopted, national policies on climate change have had dangerously and disappointingly little effect on global emissions.
Within the current economic system, perhaps the most ambitious attempt to reduce emissions has been the EU’s emissions trading system (or ETS). In operation since 2005, the ETS covers more than 11,000 heavy-energy-using power stations, factories and airlines, representing around 40% of the EU’s greenhouse gas emissions. The scheme operates via a cap-and-trade principle where an EU-wide cap on emissions means that firms must buy allowances, essentially paying for their polluting activities.
Yet although the ETS has had some success in reducing emissions, finance professor Panayiotis Andreou and I recently showed that the scheme is under-penalising those who pollute the most – primarily because the price of allowances has typically been too low.
The current price of an allowance to emit greenhouse gases is around €33 per tonne, a price already much higher than the average over the life of the ETS. However, to meet EU climate change targets, this price will need to be more like €40 by 2030 and close to €250 in 2050. Given the substantial costs this will impose on EU firms, either to pay for allowances or to invest in low carbon technologies, companies based outside the EU will have a hefty competitive advantage unless they face similar regulatory controls in their own countries.
The Conversation, 1 Feb 2021: Why the EU’s proposed carbon border levy is an important test for global action on climate change
