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Reform or Regulatory Tsunami? Climate Economist Ottmar Edenhofer Analyzes the Prospects for the European Green Deal

    Author:
  • Doug Gavel
| Jan. 29, 2021

Robert Stavins and Ottmar Edenhofer

Robert Stavins and Ottmar Edenhofer

A recording of this webinar is available here.

One of the world's top academic voices on climate change, environmental, and energy policy offered his perspectives on the European Green Deal  on January 26 during a Virtual Forum sponsored by the Harvard Project on Climate Agreements (HPCA). Ottmar Edenhofer, director of the Mercator Research Institute on Global Commons and professor of the Economics of Climate Change at the Technische Universität Berlin, offered a frank assessment of the Deal’s potential to significantly address the impacts of global climate change.

“It's a very good time to talk about the European Green Deal because now the prospects that the United States and Europe could work closer together on climate change or climate policy and energy policy are very good,” Edenhofer remarked, referring to the change in U.S. administrations and recent remarks by European Commission President Ursula von der Leyen reaffirming the EU’s intent to reducing its emission target reductions from 40 percent to 55 percent by the year 2030 and to achieve net carbon neutrality by the year 2050.

Calling it a “huge task,” Edenhofer outlined the actions that would need to occur to achieve those ambitious goals, including enhanced efforts to decarbonize the power sector, accelerated electrification for end-users, increased investments in bio-energy and semi-synthetic fuels, and advancements in carbon dioxide removal technologies. Using the EU’s climate policy impact assessment as a framework, Edenhofer walked through three different policy scenarios, ranging from one that relies heavily on regulation to one structured primarily around carbon pricing.

Calling the heavily regulatory approach a “high-risk scenario,” Edenhofer instead promoted the idea of an “intermediate step” in which a mix of policy measures and carbon pricing are deployed to move toward the goal of a 55-percent carbon emissions reduction and closer toward the longer-term strategy of using carbon pricing alone as the primary driver in CO2 reduction efforts.

“The crucial question therefore is, how can we design this intermediate step, and this is really the most important debate around this reform proposal,” he said.

Several issues would need to be addressed in this step, Edenhofer remarked.

“The intermediate step has to address the distributional issues and guarantee the stability and manage the political economy challenge between the sectors,” he said.

Edenhofer suggested that the intermediate step that may gain the political support necessary to succeed would be one that would allow for two separate Emissions Trading Systems (ETS) — one for the energy and industry sector, and the second for transportation and buildings.

“Meanwhile we could define gateways between these two systems,” he said. “Creating such gateways might have a two-fold effect — the first one is that market participants already anticipate that there are gateways and they anticipate these enterprise expectations, and this could lead to a convergence of the different prices across the sectors. And secondly, this is a starting point to manage the division of labor among the sectors, and this could be a credible pathway toward a C-price scenario when we have one ETS with one credible CO2 price scenario.”

Edenhofer also acknowledged the role that fiscal federalism could play in affecting the future direction of climate policy in Europe. While noting that carbon pricing could generate roughly 800 billion euros between now and 2050, he argued that the funding base would shrink over time, and therefore would not serve as a stable revenue source. He recommended that the member states consider an “economically reasonable reform of the ETS,” something that may be made easier with recent reforms to the EU’s ‘own resources’ financing system.

Edenhofer responded to questions from the virtual audience of more than 200 people. One focused on the impact of the new Biden-Harris Administration in Washington to impact global climate change efforts.

“The good thing is they are back in the Paris Agreement,” he said. “The announcement alone that you are committed, that the U.S. is already committed, has already helped.”

This webinar series, HPCA Conversations on Climate Change and Energy Policy, features leading authorities on climate change policy, whether from academia, the private sector, NGOs, or government. Look for an announcement about the next Virtual Forum. You will be able to register in advance for the event on the HPCA website.

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For more information on this publication: Please contact Harvard Project on Climate Agreements
For Academic Citation: Gavel, Doug. “Reform or Regulatory Tsunami? Climate Economist Ottmar Edenhofer Analyzes the Prospects for the European Green Deal.” News, Harvard Project on Climate Agreements, January 29, 2021.

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