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The Future of European Climate Change Policy

In my previous blog post, on January 14^th, I offered my personal views regarding “International Climate Change Policy & Action in the Biden Administration.” Today, I’m pleased to turn to a parallel assessment of future European climate change policy by Ottmar Edenhofer, a greatly-accomplished German economist, admired by academics, as well as leaders in government, industry, and non-governmental organizations.

Professor Edenhofer’s presentation, “The European Green Deal – Reform or Regulatory Tsunami?” and our subsequent discussion is the most recent webinar in our series, Conversations on Climate Change and Energy Policy, sponsored by the Harvard Project on Climate Agreements (HPCA). As you know, in this webinar series we feature leading authorities on climate change policy, whether from academia, the private sector, NGOs, or government. A video recording (and transcript) of the entire webinar is available here.

Ottmar Edenhofer is Professor of Economics at the Technical University of Berlin, the Founding Director of the Mercator Research Institute on Global Commons and Climate Change, and Co-Director and Chief Economist of the Potsdam Institute for Climate Impact Research. He has been a major contributor to scholarship on the economics of energy and climate change, and served as Co-Chair of Working Group III of Fifth Assessment Report of the Intergovernmental Panel on Climate Change, where I had the pleasure of working under his leadership. He is a key advisor of the German Government, as well as the European Union. He holds a Ph.D. in economics and a B.A. degree in philosophy (a pairing of degrees which – I’m delighted to say – he and I share).

In his presentation and the discussion that follows, Ottmar Edenhofer offers a frank assessment of the European Green 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 United States and Europe could work closer together on climate change or climate policy and energy policy are very good,” Ottmar notes, referring to the change in U.S. administrations and recent remarks by European Commission President Ursula von der Leyen reaffirming the European Union’s (EU’s) intent to reduce its target for emission 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 outlines the actions that would need to occur to achieve such 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, he walks us through three different policy scenarios, ranging from one that relies heavily on regulation to one structured primarily around carbon pricing.

Characterizing the heavily regulatory approach as a “high-risk scenario,” he instead promotes the idea of an “intermediate step” in a which a mix of policy measures and carbon pricing are deployed to move toward the goal of a 55-percent carbon emissions reduction, and toward a 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 says, noting that several issues would need to be addressed. “The intermediate step has to address the distributional issues and guarantee the stability and manage the political economy challenge between the sectors.”

Professor Edenhofer suggests 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 – one for the energy and industry sector, and the other for transportation and buildings.

“Meanwhile we could define gateways between these two systems. “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 carbon-price scenario when we have one ETS with one credible CO₂ price scenario.”

In his presentation, Edenhofer also acknowledges the role that fiscal federalism could play in affecting the future direction of climate policy in Europe. While arguing that carbon pricing could generate roughly 800 billion euros between now and 2050, he notes that the funding base would shrink over time as emissions decrease, and therefore would not serve as a stable revenue source. He has answers for this challenge as well.

After his presentation, Professor Edenhofer responds to questions from the virtual audience of more than 200 people. One question focuses on the impact of the new Biden-Harris Administration in Washington on global efforts to address climate change.

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

All of this and much more can be seen and heard in the full webinar here. I hope you will check it out.

Previous webinars in this series – Conversations on Climate Change and Energy Policy – have featured Meghan O’Sullivan’s thoughts on Geopolitics and Upheaval in Oil Markets, Jake Werksman’s assessment of the European Union’s Green New Deal, Rachel Kyte’s examination of “Using the Pandemic Recovery to Spur the Clean Transition,” Joseph Stiglitz’s reflections on “Carbon Pricing, the COVID-19 Pandemic, and Green Economic Recovery,” Joe Aldy describing “Lessons from Experience for Greening an Economic Stimulus,” and Jason Bordoff commenting on “Prospects for Energy and Climate Change Policy under the New U.S. Administration.”

The next bi-monthly HPCA Conversation on Climate Change and Energy Policy will take place in March. You can register in advance for that event at the HPCA website.

The European Green Deal

From his perspective as Principal Advisor to the Directorate General for Climate Action in the European Commission (EC), Jacob Werksman is cautiously optimistic about the direction of international climate policy. Werksman was my guest in the second webinar of our new series of Conversations on Climate Change and Energy Policy, held July 9^th, sponsored by the Harvard Project on Climate Agreements (HPCA). A recording plus transcript of the webinar is available here.

Stavins and Werksman during remote conversation, July 2020

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Jake Werksman’s role since 2012 as Principal Adviser to the Directorate General for Climate Action in the European Commission has focused on the international aspects of European climate policy. His responsibilities include leading aspects of the European Union negotiations under the Paris Agreement and – more broadly – the United Nations Framework Convention on Climate Change.

Jake is an international lawyer, and holds a Bachelor’s degree from Columbia University, a J.D. degree from the University of Michigan, and an LL.M. degree from the University of London. He has been involved in international climate change efforts for more than a decade since he began consulting for the Danish Government leading up to the 15^th annual Conference of the Parties (COP-15) in Copenhagen in 2009. It was during that meeting, Werksman remarks, that two different models of international climate policy – the bottom-up ‘pledge and review’ approach versus the top-down legally binding agreement approach – first collided, all but derailing substantive action.

Jacob Werksman

“Logistically there were huge problems,” he says. “A lot of people would certainly characterize it as not being the success at least that was hoped for.” (But, I would note, it did lay the foundation for Cancun, and everything after that, which in a sense, led to Paris.)

The Paris Agreement, reached at COP-21 in 2015, obligates signatories to establish and achieve meaningful emissions reduction targets through the use of nationally determined contributions (NDCs), which, when aggregated, are intended to limit the increase of global temperatures to less than two degrees centigrade above pre-industrial levels.

While that goal is obviously jeopardized by the Trump Administration’s decision to withdraw from the Paris Agreement, Werksman is encouraged by the global response to that decision.

“The immediate impact of the Trump Administration’s withdrawal from Paris was that it helped to galvanize the international community around Paris. And you see that in the way in which no other party followed suit,” he says. “There may have been some that were on the edge of joining what they might have seen as a populist rejection of Paris and climate policy, but that didn’t happen.”

Much of our discussion focuses on the European Green Deal, the European Commission’s proposed ambitious roadmap to address climate change by increasing the production of renewable energy and increasing energy efficiency, more stringently regulating emissions from industrial and energy sources, and seeking to reduce emissions in the building and transportation sectors.

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Description automatically generated — *Werksman representing the European Union in international climate talks*

“There were a lot of bold proposals in the original European Green Deal,” Werksman says. “As they relate to the international process, they also contain a proposal to move from our existing Paris Agreement targets of at least 40 percent reduction of emissions from 1990 levels by 2030, to a 50 to 55 percent emissions reduction target. And it contains a climate neutrality goal by 2050. So, the EU has committed to being a net zero economy, the first net zero region, by 2050. So, these are very ambitious pushes in the direction of low-carbon and a climate-resilient economy.”

Werksman says that with the exception of the climate-neutrality goal, which has already been endorsed by EU leaders, all of the other action items in the European Green Deal will still require approval by the European Parliament and the European Council (where each member state has one vote).

A webinar viewer asks Werksman for his assessment of the $100 billion dollar climate pledge made by the richest countries in 2009, prior to the Paris Agreement. Werksman responds that the Organization for Economic Cooperation and Development (OECD), which tracks the fund raising efforts, estimates that $70 billion had been raised by 2018, while also stating that more needs to be done to better leverage private finance.

“There are significant public resources available, but we need to get better at using those through leverage and guarantees, participating with private sector banks in the shaping of softer loans in order to get the money flowing to a larger scale,” he remarks.

I wrap up the webinar by asking Jake his opinion of the youth climate movements that swept through the United States and Europe last year, and Werksman responds that he finds them both “inspiring and sobering.”

“They had two messages. One was, we agree with everything that people like me have been saying about the need to act and to act urgently. And why haven’t you succeeded? Why haven’t you done better if we can talk in incremental terms about the kind of progress that we’ve been able to make moving from the Framework Convention to the Paris Agreement? But you try to explain to a young activist who doesn’t see change on the ground how that is success after 30 years of effort and you quickly run out of words,” he says.

“I very much hope that when they’re allowed back on the streets and back into the classrooms that they won’t have forgotten this, and in particular when they’re allowed into the voting booths, they won’t have forgotten this and they will help make up for some of the shortfalls of the efforts that our generation has been making.”

As I noted at the outset, a recording of the webinar with Jake Werksman, including a complete transcript, is available here. I hope you will check it out.

The previous webinar in this series – Conversations on Climate Change and Energy Policy – featured Meghan O’Sullivan’s thoughts on Geopolitics and Upheaval in Oil Markets. And the next one is scheduled for 9:00 am (Eastern Time USA), August 19^th, when my guest will be Rachel Kyte, Dean of the Fletcher School of Law and Diplomacy at Tufts University and long-time participant in international climate change policy research and action. Click here to register in advance for that webinar.