Climate protection does not come for free. But it does not have to be as expensive as the political discussions would suggest. Climate protection could also be realized without the excitement of our time.
The European Investment Bank (EIB) recently published remarkable survey results. According to the EIB Climate Survey 56% of Germans are in favor of limiting individual consumption. They would be “…for a carbon budget where each person only gets a limited number of allowances for carbon-intensive things (like non-essential goods, flights or meat) per year”. The survey result fits in well with the many discussions of our time about what individuals are still allowed to do in times of climate change, where renunciation is appropriate and where the state should, if necessary, issue bans.
It is not known exactly whether the respondents are aware of what they would have to forego if restrictive, individual carbon budgets were actually put into practice. The commitment to climate protection is quickly discarded. Switching your own way of life to serious climate protection is a completely different matter. The recently failed Berlin referendum for more ambitious climate goals has just revealed that. Analyzing the cognitive dissonances that seem to be widespread these days would be a topic in itself. But that’s not the point here.
Climate protection with market-based instruments
Instead, this article deals with the question of what a cost-minimising climate protection policy looks like. And this quickly leads to the core question: should the inefficiency of the planned economy be tested once again in climate policy, or shouldn’t we rather rely on the tried-and-tested efficiency of the market economy?
Market economy and climate protection – many critics of the market economy see an inner contradiction in this: Isn’t it the market economy, with its enormous economic growth, that caused climate change in the first place? Yes and no. No, because the socialist planned economies of Eastern Europe had a far worse environmental record than the Western market economies. Yes, because the market-oriented countries have long been blind to the value of nature. Environmental damage and its consequential costs played no role in economic calculations for a long time.
The English economist Arthur Cecil Pigou therefore suggested around 100 years ago that the social and ecological costs of production or consumption should be taken into account by means of a tax. Because the environment needs a price. The economic actors then base their actions on these ecologically more honest prices. This tends to reduce behavior that is harmful to the environment or climate. Companies are given incentives to invest in the research and development of environmentally and climate-friendly production because they can save money in the long term, namely the payment of environmental taxes.
Environmental taxes and emission allowances
It took a long time to put Pigou’s idea into practice. In Germany, the ecological tax reform was introduced in 1999. The result was, among other things, a higher mineral oil tax. From a climate policy perspective, there is an even better instrument: emission certificates. A concrete maximum amount of CO2 emissions is set here, which appears to be acceptable from a climate policy point of view. This means that there is a fixed upper limit that cannot be pushed up even if economic actors are willing to pay too much.
If you cannot avoid CO2 emissions, you have to purchase emission certificates – i.e. certificates that entitle you to emit CO2. Trading these certificates means that CO2 emissions are saved where saving is particularly easy or where avoiding CO2 emissions is possible at low cost. Or the other way around: The certificates ultimately end up with the companies that really need them urgently because they cannot avoid CO2 emissions in the production process and are therefore willing to pay a lot.
The information about where the avoidance costs are lowest is distributed decentrally. The state does not have this information. And he doesn’t need them either. Every actor who thinks economically will consider what is cheaper: paying the price for an emission certificate or forgoing the emission. If it is easy for economic actors overall to avoid CO2 emissions, then the result is a low certificate price because demand for emission certificates is low. However, if it is difficult or expensive to avoid emissions, then the demand for allowances is high and their price increases. The decisive factor is that none of this has any influence on the amount of total emissions. The amount is politically limited. The price adjusts accordingly. Tradable emission certificates are therefore a cost-efficient method of reducing climate-damaging CO2 emissions to a politically specified, tolerable level.
The European Union installed the European Emissions Trading System (EU ETS) back in 2005 to reduce greenhouse gas emissions. The EU ETS covers 30 countries, namely all 27 EU countries plus Norway, Iceland and Liechtenstein. In total, the emissions from around 10,000 energy-intensive installations are recorded, primarily in the power generation and manufacturing industries. This covers around 36% of greenhouse gas emissions in the EU. Intra-European air traffic has also been included in the EU ETS since 2012. The price for a certificate that entitles you to emit one tonne of CO2 is currently 85 euros. In Europe, emissions from sectors covered by emissions trading have fallen by 36% since 2005. In Germany, there has also been national emissions trading for the heating and transport sectors since 2021.
Cost-effective: Pick low-hanging fruit first
What conclusions can be drawn from this?
- The accusation by many activists that nothing is happening in terms of climate policy is wrong. With environmental taxes and above all with the world’s largest emissions trading scheme, instruments have long been used in the EU and in Germany that contribute to reducing greenhouse gas emissions.
- Emissions trading ensures that the low-hanging fruits are picked first. Since it makes no difference to the global climate where emissions are avoided, all efforts should be directed towards expanding emissions trading. Instead of desperately trying to avoid all emissions in Germany (and Europe) and at considerable financial expense, it would probably be much cheaper to first pick the lower-hanging fruits in other parts of the world. Poorer countries could be given financial support for this.
- Only one political decision is necessary for a cost-efficient climate policy: How high can CO2 emissions be in the future? CO2 emissions are becoming a scarce commodity due to tradable emission rights. Dealing with scarce goods is demonstrably best regulated by the market. However, this would make climate protection a relatively silent event. The prices for CO2 emissions will gradually increase and so will the prices for goods and services that are particularly harmful to the climate. Citizens have to adjust their behavior from time to time and they would certainly whine about rising prices. But that’s really nothing new. However, the market economy ensures that whining is reduced to the lowest possible level. The social climate would probably also be detoxified if climate protection were controlled exclusively via prices and no longer by erratic suggestions from politicians, activists, friends or neighbors who are keen to regulate.
Cost transparency instead of expensive bans
A cost-effective climate policy does not come for free. But it is significantly cheaper than trying to protect the climate with detailed regulations and bans. Some critics, on the other hand, believe that relying solely on certificates is too expensive. The price for emission certificates would go through the roof if bans were not also used as a climate policy instrument.
But that’s just not true. The price that arises from emissions trading only makes the costs of climate protection policy transparent. It doesn’t get any cheaper, not even with bans. Anyone who believes that bans are free, or at least cheaper, has probably never heard of opportunity costs. They arise from lost benefits. For example, if driving were banned, most people would not incur any direct financial costs as a result. They would even save money because they would no longer need a car and would no longer have to buy gas. But they would miss out on all the benefits they derive from driving. And people obviously rate this benefit higher than the costs of driving a car, because otherwise they would have long since decided against driving a car for cost reasons.
Unfortunately, the public discussion about the right climate protection policy is packed with planned economy ideas. The approach of the EIB climate survey cited at the beginning, to grant everyone only a limited CO2 budget for their lifestyle, stems from the logic of a planned economy: every citizen should make the same contribution to reducing greenhouse gas emissions. So far, the logic has also been reflected in the sector-specific reduction targets: each sector should make a specific contribution to reducing greenhouse gas emissions. Fortunately, the governing coalition now intends to change course as a result of the most recent coalition committee. And finally, fixing on national climate targets is inefficient when the costs of avoiding CO2 are often lower abroad. For the environmental economist Joachim Weiman it is even a cardinal mistake to see climate protection as a national task in particular. In a special report in 2019, the Council of Economic Experts (“Wirtschaftsweise”) also advocated expanding certificate trading. The transport and buildings sectors should be included in the EU ETS by 2030. Presumably in 2027, emissions in the heat and transport sectors will actually be priced as part of Emissions Trading II. In addition, the Advisory Council recommended that the procedure be coordinated globally, because climate change is a global phenomenon and greenhouse gases do not stop at national or continental borders.
At the latest, the discussion about a possible end for gas and oil heating has opened the eyes of many citizens to the fact that the ecological restructuring of society could overwhelm them financially. The costs that individuals would have to incur for climate protection measures could upset entire life plans. With a nationwide certificate trade, the costs could be significantly lower.
And finally, the 56% of the EIB survey participants mentioned at the beginning could also be happy: they would get their CO2 budget with a comprehensive emissions trading system. Only not individually, but in a tradable version for the national economy as a whole – but certainly cheaper and with less interference with personal freedom of action.
