Policy brief

A whole-economy carbon price for Europe and how to get there

Putting carbon pricing at the centre of the EU climate policy architecture would provide major benefits. Obtaining these benefits requires a uniform,

Publishing date
09 March 2021

The European Union’s plan for climate neutrality by 2050 reopens the question of the role carbon pricing can and should play. Carbon pricing should not – and ultimately cannot – only be an enforcement tool or backstop that ensures targets are met, while the heavy-lifting of decarbonisation comes from directed technological change policies. Instead, a technologyneutral carbon price must become the main element, providing signals for decarbonised operations, investment and innovation in all sectors. This would guarantee cost-effective emission cuts, provide a clear path to net-zero and is a requirement for international cooperation and a global carbon pricing regime. Carbon pricing must therefore be at the core of EU climate policy.

However, introducing a uniform, credible and durable carbon price across all sectors right away is politically and institutionally challenging. Moreover, policies to address other market failures will continue to affect significantly the impact of carbon pricing. The role of carbon pricing should therefore be strengthened gradually, taking these considerations into account.

Current climate policies should thus be further developed within a three-part framework. First, a separate emissions trading scheme should be introduced for the transport and heating sector to prepare the sectors for integration into the EU emissions trading system, and to manage distributional implications. A carbon price balancer would manage price differences between the two systems in the short term. Second, a carbon price stabiliser (a price floor and price ceiling) should be implemented for both systems to manage price expectations and ensure price convergence between the two systems in the long run. Third, complementary policies (carbon price amplifiers) should be strengthened or put in place to trigger investment and innovation, helping policymakers to commit credibly to enforcing the cap and addressing other market failures. This approach would ensure convergence on a uniform, credible and durable carbon price for the whole economy.

About the authors

  • Georg Zachmann

    Georg Zachmann is a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. His work focuses on regional and distributional impacts of decarbonisation, the analysis and design of carbon, gas and electricity markets, and EU energy and climate policies. Previously, he worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin, the energy think tank LARSEN in Paris, and the policy consultancy Berlin Economics.

  • Ottmar Edenhofer

    Ottmar Edenhofer is Director of the Potsdam Institute for Climate Impact Research (PIK), Professor for the Economics of Climate Change at the Technical University Berlin as well as founding director of the Mercator Research Institute on Global Commons and Climate Change (MCC). Furthermore, he is a member of the German National Academy of Sciences Leopoldina and of the National Academy of Science and Engineering acatech. From 2008 to 2015 he served as Co-Chair of Working Group III of the IPCC, shaping the Fifth Assessment Report on Climate Change Mitigation substantially.

     

  • Mirjam Kosch

    Mirjam Kosch is an enthusiastic environmental scientist and completed her doctorate in economics at ETH Zurich on climate policy in the electricity sector. As part of her doctoral thesis, she empirically analyzed the impact of renewable energy subsidies and carbon pricing. Currently, she is working on the expansion of the European emissions trading system and investigating the interplay of different policy instruments as well as the impact of climate policy on electricity prices. In addition, Mirjam Kosch is actively engaged in the dialogue between science and politics.

  • Michael Pahle

Related content