We Need to Rethink Climate Protection

Donald Trump despises climate policy. With the world's largest economy no longer participating, what is the point of Europe engaging in climate action and damaging its economy in the process? ZEW President Achim Wambach explores this question in a guest article for DIE ZEIT.

Whenever the USA changes its course in climate policy, Europe is forced into action. This was the case in 2023, for example, when Joe Biden introduced massive tax breaks with the Inflation Reduction Act (IRA) to encourage the relocation of green technology production facilities to the US. The EU then promised companies in the EU the same support ("matching grants") in order to prevent their relocation to the US. This is why the battery manufacturer Northvolt received 700 million euros for the construction of a factory in the German federal state of Schleswig-Holstein – the company had announced that it would otherwise invest in the US.

Northvolt is now insolvent, and the IRA is also history. President Donald Trump has stopped the programme. In the meantime, the US climate policy has changed again – and the US withdrawal from the Paris Climate Agreement early this year gives cause for concern that it may even be at an end. In the past, the country had actually committed to reducing its emissions by 50 to 52 per cent by 2030 compared to the base year 2005. However, this commitment no longer applies.

Even though individual states – above all California – continue to work towards climate neutrality, this is a serious setback for international climate policy. In addition to the direct impact on American emissions, the changed US policy is likely to have a signal effect, which is even more damaging: When one of the biggest emitters of greenhouse gases walks out on the climate accords, the temptation grows for other countries to roll back climate policy as well. This effect is amplified by the fact that the withdrawal of the USA from the Paris Agreement also means that money from America for climate measures in other countries is no longer available.

Reactions in the EU are divided into two opposing groups. Some are falling into a "Now more than ever!" mood and are reminding Europe of its pioneering role. The others want to use the change of course in the US as an opportunity to dismantle climate action themselves, more specifically the European rules on this, the Green Deal. Neither approach is helpful.

If you are working together on building a dam and the excavator breaks down, it makes little sense to continue building with a shovel and bucket. The EU is responsible for seven per cent of global emissions, while the US emits almost twice as much, namely 13 per cent. Without the United States’ contribution, the climate problem will not be solved, especially as other countries are likely to follow suit. If the excavator breaks down, you have to try to repair it – but you should also prepare for the dam bursting and clear out the cellar.

Politicians can no longer assume that the Paris target will be met with certainty and that the global temperature rise will remain below two degrees. Anyone who still relies on this is acting negligently. From this follows that higher priority must be attached to adapting to a changed climate. Climate policy consists of two elements: reducing emissions and adapting to the change in climate conditions. Germany has set up the "Nature Conservation and Climate Adaptation" special programme for this purpose. Under this programme, 500 million euros are available to prepare against heat, drought and torrential rainfall. Local authorities can use this money to improve protection against flooding, for example. This commitment should be strengthened. This is the first consequence of the change of course in the US.

At the same time, to keep with the image, the excavator has to be repaired. Europe will only be a pioneer if it contributes to increasing the attractiveness of climate policy for other countries. First of all, this means developing new technologies that make it easier to do without emissions. European climate policy has a deterrent effect, however, if it increases unemployment and causes industry to relocate abroad. This is also the political dilemma for the EU, resulting from Trump’s policy: If global emissions rise, it will be difficult to justify why you should spend a lot of money on modernising the energy efficiency of your own home. Several more years of low economic growth and increased dissatisfaction coupled with aggressive climate policies will drive voters even further to the margins.

Making money with green technologies in this system

This negative development can be prevented. In order to maintain the acceptance of climate policy and present it as a global role model, the EU should organise it as efficiently as possible. This does not mean withdrawing from the Green Deal, as some are demanding, but implementing it in a cost-effective way. We will no longer be able to afford expensive special approaches.

The EU has already implemented some of the right instruments. A European emissions trading scheme for the energy sector and for industry is already in place, and a second scheme for buildings and transport will be launched in 2027. From then onwards, around 90 per cent of emissions will require an emission allowance. And this certificate costs money. The number of emission allowances is reduced every year so that the European energy saving targets are achieved. Trading in these papers ensures that emissions are always reduced where it is most cost-effective. This creates the right incentives for companies to invest and innovate. Making money with green technologies is possible in this system.

Further costly interventions in the markets will then be less necessary. The decision to phase out coal by 2038 may have been sensible structural policy, but it was not necessary for purposes of climate action. Burning coal has already become so expensive as a result of emissions trading that energy suppliers are switching off their power plants. EnBW has announced its intention to phase out coal as early as 2028, because it is simply no longer economically viable and not because of Berlin’s ‘coal decision’. A similar development can be expected in the automotive sector when the second emissions trading scheme will trigger a rise in petrol and diesel prices. Electric cars will then automatically become more and more attractive. Fleet targets set by the EU and a ban on combustion engines will become obsolete or may even make the transition more expensive if in the first few years consumers do not fully exploit the more cost-effective ways of reducing emissions, for example through more efficient engines and energy-saving behaviour.

The expensive subsidy programmes for renewable energies should also be put to the test. Federal Economics Minister Katherina Reiche (CDU) quite rightly wants to reduce them. Electricity from the sun, wind and water will be increasingly financially attractive in future, even without subsidies.

However, the introduction of the second emissions trading scheme is problematic from a socio-political perspective as its effects will be felt directly by consumers – at the petrol station and on their heating bills. The European Commission would therefore be well advised not to introduce this scheme abruptly, but to allow prices to rise gradually, as Germany has done with its national CO2 price in recent years. A joint paper by 16 Member States, including Poland, the Czech Republic and Germany, shows that the governments are aware of the social problems associated with the scheme. They are calling for key adjustments to be made to the system before it is launched in order to ensure price stability and avoid social hardship. A price corridor in the early years would achieve this.

At the same time, much more attention needs to be directed at avoiding high financial burdens for people. When energy prices rose sharply during the gas crisis, the German government set up a commission to quickly draw up proposals to compensate households and companies. Much of the work was done in an unsystematic way because there was a lack of available data and of sufficient time for analyses. It is still possible to avoid repeating this mistake and to prepare for the increase in fossil fuel prices. For example by adopting the much-discussed proposal of a ‘climate money’, i.e. a scheme for transferring the revenue from emissions trading back to citizens. Whether this is the optimal solution is debatable. But without an alternative plan it is probably the solution that is most likely to work.

Protecting the climate is a shared, global task. It has the character of a public good: Everyone benefits from the efforts of others, even if they contribute little or nothing themselves. By pulling out of the Paris Agreement, Donald Trump has damaged cooperation in international climate policy. To prevent his behaviour from becoming a role model, the EU must realign its approach: Europe needs a climate policy that is more efficient, includes the social dimension and promotes innovation.

The guest article was first published in the weekly newspaper DIE ZEIT.