9/29/2020 EU Could Turn Coronavirus Recovery Green If It Chooses - Bloomberg

Politics & Policy

Will the Coronavirus Turn Out Green or

Brown?
It’s too early to say what role the pandemic will play in the fight against climate change. But Europe
could hold the key.

By Andreas Kluth
September 16, 2020, 12:00 PM GMT+7

Fighting more than one crisis. Photographer: Bloomberg/Bloomberg

Covid-19 has been simultaneously good and bad for humanity’s struggle to limit global
warming. So far, it’s hard to say what the net balance will be. But the European Union could
tilt it positive, if it so chooses.

On the good side of the ledger, global emissions of greenhouse gases plummeted during the
lockdowns. On the bad side, they’re already heading back up to pre-corona levels. This year’s
dip will make us no more likely to achieve our goals for slowing climate change.

Pandemic Blip
This year’s decline in carbon dioxide emissions won’t stop climate change
Source: International Energy Agency

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9/29/2020 EU Could Turn Coronavirus Recovery Green If It Chooses - Bloomberg

The recent drop in demand for ener y also had perverse side-effects. The price of oil
plummeted, making this fossil fuel more attractive in the recovery compared to greener
alternatives. Even the damper on air travel hasn’t been unequivocally good for the climate. As
airlines bought fewer emission allowances in the EU’s cap-and-trade system, the price of
these certificates dropped. This made carbon pollution cheaper in other sectors of the
economy, such as cement production.

The pandemic’s effect on climate politics is also ambiguous. Just before the coronavirus
arrived in Europe, Ursula von der Leyen, president of the European Commission, had
declared decarbonization the EU’s priority, with a “Green Deal” to make the whole bloc
emissions-neutral by 2050. Later today, she’ll probably announce even more ambitious
targets.

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But the Covid-19 recession has pushed ecolo y down a notch in urgency, below economics.
The Czechs, Poles and others have suggested shelving the Green Deal to concentrate first on
limiting the economic fallout of Covid-19. The fight against global warming, in their logic,
amounts to a huge exogenous cost which cannot be borne during a depression.

Other politicians disagree. Von der Leyen, for example, is trying to market this week’s
acceleration of the Green Deal as a twofer: The huge public and private investments required
for decarbonization, so goes her pitch, will simultaneously provide the fiscal stimulus to
boost aggregate demand and overcome the corona recession. Thus, Europe’s rescue packages
are designed to be “green” (see chart).

Europe’s Corona Stimulus Is Greenest

By contrast, the largest emitters have chosen economy over climate
Sources: Vivid Economics Green Stimulus Idex; Our World In Data
Note: Based on stimulus measures announced as of July 21.

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9/29/2020 EU Could Turn Coronavirus Recovery Green If It Chooses - Bloomberg

But economists aren’t convinced that these two concurrent struggles — against recession and
against global warming — are natural policy partners. The “Tinbergen rule,” named after a
Nobel laureate in economics, says that if you have N different policy goals, you require at least
N different policy instruments, otherwise there will be trade-offs and conflicts.

For example, limiting climate change requires raising the price of carbon. But this also means
higher ener y costs, which dampen the recovery. Subsidizing green products, like electric
cars or fuel cells, implies even more public borrowing at a time when government debt is
already high, and therefore requires tax hikes sooner rather than later, which will hurt
demand. And so on.

But there’s a solution, and it’s one the EU should grasp and then evangelize all over the
world. It’s to stop subsidizing things labelled green with public money, and to instead focus
entirely on charging a price for things that are brown, then recycling the money that’s
earned.

As it happens, the appropriate instrument already exists. It’s that aforementioned European
emissions-trading system, the world’s largest of its kind. It fixes the amount of carbon that
certain industries, such as steel makers or power generators, may emit. Companies then have
to buy allowances, which they can resell to other firms if they don’t need them.

Earlier this year, I argued that using this kind of price signal is the most “liberal” and efficient
way to reduce emissions, because individuals and firms are free to adapt however they wish.
During the coronavirus outbreak, I then suggested that the EU should grab this opportunity
to expand its emissions-trading system to the whole economy. It currently only covers sectors
that account for about half of Europe’s emissions. Now is the perfect time for von der Leyen
to apply it to all industries.

Such a scheme could also help pay for a broader recovery. Economists Clemens Fuest and
Jean Pisani-Ferry have proposed using the revenues from the EU’s emissions-trading system
as a new funding source for the EU itself. At present, the EU is financed mainly through
national contributions by member states, and revenues from selling carbon allowances go
back to individual countries.

If the carbon revenues instead become EU funds, they can be used to repay the bonds soon to
be issued by the bloc to fund the huge recovery program called Next Generation EU. This way
the money is taken from polluters and recycled into stimulus. Both policy goals are brought
into harmony — and the EU is one step closer to solving its institutional problems.

The EU must then steadily decrease the number of carbon allowances, encouraging
companies to emit ever less. Of course, the EU and the U.K. together account for only about

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9/29/2020 EU Could Turn Coronavirus Recovery Green If It Chooses - Bloomberg

10% of worldwide emissions. So bringing down global emissions will require others, above all
China and the U.S., to decarbonize too.

The EU should therefore make its emissions-trading system open to all countries. Companies
from states that don’t participate will have to pay so-called carbon border adjustments when
exporting to the EU. The long-term goal is a cap-and-trade system that spans most large
economies in the world, and leads to one global carbon price, which is high and rising. It
won’t be easy. But it may be our best shot at saving the planet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its
owners.

To contact the author of this story:

Andreas Kluth at akluth1@bloomberg.net

To contact the editor responsible for this story:

Nicole Torres at ntorres51@bloomberg.net

Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt
Global and a writer for the Economist. He's the author of "Hannibal and Me."

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