“Taking on an economic perspective is indispensable for gaining a comprehensive understanding of the climate problem,” Rausch emphasises at the beginning of the #ZEWPodcast. Climate-damaging emissions arise in almost all areas of the economy and everyday life as an unintended result of market activity. “The key problem is that the many decisions made in our economic system do not take the costs of greenhouse gas emissions into account at all, or only in part,” says the ZEW economist. It is therefore necessary, he says, to create incentives to reduce greenhouse gas emissions that both take into account the role of the market as the cause of emissions and at the same time use the power of the market to find solutions.
CO₂ price influences economic behaviour
Like any other price, a CO₂ price has the potential to guide economic behaviour and influence decisions, says Rausch, adding: “They help companies and consumers understand that the atmosphere is a scarce resource.”
The economist considers the European Emissions Trading Scheme (EU ETS), introduced in 2004, a success story in terms of emissions reduction. Thanks to this instrument, the reduction targets could be met and at the same time the burden on companies remained relatively low. However, there are also difficulties: “A key lesson we have learned is that an inflexible trading system with a fixed amount of emission certificates can be unsuitable for developing long-term incentives for CO₂ avoidance,” says Rausch. It is important to ensure that the price level also stimulates innovation and investment in the long term. In recent years, repeated interventions such as the introduction of the Market Stability Reserve have therefore been necessary to increase the price.
Stricter climate targets require political reforms
In order to minimise the costs of the tightened climate targets and to avoid unintended distribution effects between countries, Rausch believes that adjustments in European climate policy will be necessary in the future. One possibility is to extend the EU ETS to include other sectors such as transport and agriculture, which are currently not covered by the emissions trading scheme. A second possible scenario is the introduction of a second emissions trading system that includes the sectors under the Effort Sharing Regulation (ESR), so that ultimately two European CO₂ prices are formed. Apart from that, the introduction of a European CO₂ border adjustment could help reduce emissions. “The idea is that the EU will soon impose a carbon tax on the import of carbon-intensive goods into its economic area, especially on imports from countries with less stringent emissions regulations,” says the ZEW economist. This could at least partially decrease competitive disadvantages for European producers and encourage trading partners to reduce their emissions.