No Brainers and Low Hanging Fruit in National Climate Policy

by Francesco Caselli, Alexander Ludwig and Rick van der Ploeg

This blog is also published as Vox column. Here is an interview on the book.

We are in the midst of a process of climate change, which is already wrecking severe damage to the livelihoods of billions around the globe. Together with adapting to the changes that have and will occur, slowing the rate of increase of average temperature, and limiting the level at which temperature will eventually settle, is the defining challenge of our generation and the most important determinant of the prospects for prosperity of future ones. The target agreed on in the 2015 Paris United Nations Climate Change Agreement is to ensure that global mean warming stays below 2 degrees Celsius above preindustrial levels and preferably limit the temperature increase to 1.5 degrees Celsius. This implies that emissions for the whole planet should be reduced as soon as possible and reach net-zero in the second half of the 21st century – a drastic deceleration of the rate at which we currently release greenhouse gases (GHG). To ensure that the world’s climate goals are met, and that the world economy thus reaches net-zero emissions of greenhouse gases (primarily carbon dioxide and methane) by the mid-century, effective policies must be implemented.

The main aim of our CEPR eBook No Brainers and Low Hanging Fruit in National Climate Policy is to offer contributions to each of the featured nations’ debates over the climate-change policies to fast track. Which policies will have the fastest and/or largest cumulative impact? Which ones are the most technically or financially feasible? Which are least likely to hit prohibitive political-economy obstacles to their implementation? Since we felt that the answers to these questions were likely to be country specific, we decided to commission (mostly) country-specific essays. As we now read the essays, we find our conjecture was correct: the low-hanging fruit is indeed different in different countries. What the no brainers and low hanging fruit in any country is depends on which climate policies are already in place and what the political constraints are, as well as the country’s geography, natural-resource endowment, industrial structure, government institutions, etc. This does not mean, however, that one country cannot learn from the debates taking place in another – particularly when some countries are further behind in their fight against carbon emissions than others –, or even occasionally identify similar low-hanging fruit. Allowing at least some of the essays to double as case studies helpful to other countries is an ancillary goal of the book.

Our book contains 18 country chapters – on Argentina, Brazil, the Middle East and North Africa (MENA), India, China (two chapters), Australia, the United States, Canada, the United Kingdom, France, Germany (two chapters), Denmark, Norway, Sweden, Russia and Poland –, one chapter on the European Union (EU), and three chapters that embrace those country specific chapters by tackling cross-country issues and international aspects of climate change policies. As is clear from these essays, national climate policies are at least as numerous as the manifold sources of GHG emissions themselves. Despite this variegated picture, several common themes shine through which we glance at in this overview.

One major recommendation across numerous chapters is to reform existing patchworks of policies within countries on carbon taxation and regulations on carbon emission, which reduce the effectiveness of these schemes. Sweden is a rare example of a country which has high and broad carbon taxes. In contrast, most other countries have low or no carbon taxes and many exemptions. Reforming carbon pricing schemes, respectively introducing one national carbon price with coverage standards independent of the source of carbon emission (coal, gas, or oil), is therefore a recommendation of, e.g., the chapters on Argentina, Australia, Canada, China, Germany, Poland, the United Kingdom, and the United States. A robust initial carbon price that rises credibly, steadily, and predictably over the next thirty years and at a pace compatible with the target of net zero emissions by 2050 will give a clear signal to energy producers and to industry to move into renewable energies. Revenues from this tax could be partially transferred back through the general income tax and transfer system to low-income households to compensate them for the higher tax on carbon consumption. Such a transfer policy may be coupled with inter-generational transfers from future generations – who will reap the benefits from a higher carbon tax – to current generations.

Related policies on the price mechanism are the elimination of energy subsidies, suggested, e.g., in the chapters on Argentina, Germany, the EU, Russia, and MENA. Again, since energy subsidies mainly benefit low-income households, such policies would need to be accompanied by redistribution to ‑ and improved provision of pubic goods for – low-income households. Implementing such redistributive schemes requires a well-functioning government infrastructure and reliable institutions that act in a time consistent manner. Therefore, the scope for implementing such schemes — and thus the political feasibility of eliminating energy subsidies in the first place — differs across countries. For example, the chapter on MENA argues that redistribution through the tax and transfer system will be difficult to implement in the region because of a lack of well-functioning social welfare programs, which make energy subsidies a part of an implicit social contract. This calls for a holistic approach to climate change policies where an elimination of energy subsidies is accompanied by a build-up of an improved government infrastructure. More generally, the chapter on Sweden makes the point that decarbonization can be made more efficient by ensuring that the cost of reducing emissions by one ton of carbon should be brought more in line for different policy measures and across different sectors. It gives the example that the abatement cost per ton of carbon of imposing emission targets for transportation can be much more costly than encouraging negative emissions which are currently not priced, such as increased uptake from land use and carbon capture and storage of CO2 emission from non-fossil sources, and thus policy should focus more on the latter.

As a complement and/or an alternative to transfer payments, to combat the adverse distributional consequences of a transition towards zero-carbon production, governments should use retraining programs aimed at increasing the supply of “green” skills, i.e., skills demanded in zero-carbon jobs. As argued in both the chapters on the EU and the United Kingdom, while employment options in the green sector of the economy will be plentiful, shifts into new occupations may come with adjustments costs, which such training programs would address. Retraining programs will therefore not only lead to a more equal sharing of the economic benefits of a transition towards a carbon-free economy across workers in different sectors, but will also smooth this transition in the first place.

Next to the negative externality caused by greenhouse gas emissions and the ensuing distributive consequences of addressing those through the reforms of pricing schemes, national and international climate policies further confront various positive production externalities, namely learning-by-doing and R&D externalities as well as network externalities. Internalization of such externalities through government regulation, taxation or subsidies plays a prominent role in many chapters of the book, though their particular shape depends on the state of development of the respective country. Take electrification of transportation: The chapter on India argues that a transition towards electrification in the transportation sector of 2 and 3-wheelers should be achieved by a mandate. This would incentivise the electrification of the entire transportation sector. Similar arguments are made in the chapter on Poland where regulatory requirements on fuel efficiency and a ban on imported cars could lead to a rejuvenation of the vehicle fleet. One of the two chapters on Germany, instead, argues in favour of a fees and rebates instrument, or feebates  (fees on vehicle producers with above average emissions and rebates to producers with below average emissions), to incentivise a switch towards electrification. This would have to go along with intensified green spending on infrastructure through charger stations. Such spending will internalize network externalities: more charger stations will lead to more demand for electric cars creating a virtuous cycle. These R&D and network externalities also occur in the power generation sector and feature in the chapters on the United States and Germany. To internalise these positive network externalities, green public and private investment programmes will be required.

More generally, substantial increases in public investment in green infrastructure and public subsidies to R&D and green innovation, come up frequently in chapters on countries at the forefront of the technology frontier – such as Germany, Denmark, the United Kingdom, and the United States. As the chapter on the United States puts it, this would also be politically feasible. Public support for the development of carbon capture and storage technologies and the application of pyrolysis to biomass waste are also explicitly mentioned in the chapter on Denmark.

The most radical policy suggestion is to set the carbon price to infinity by prohibiting fossil fuel extraction. While this may sound like a purely theoretical idea, Denmark has already decided to prohibit the extraction of gas and oil by 2059 at the latest, and it is at least part of the mainstream political discussion in Norway (where it would have a large global impact). The chapter on the MENA region also explores a near future in which countries in the region leave fossil fuel in the ground and use instead their vast pool of renewable resources for the transformation of energy systems. Such a transformation would also require government infrastructure and time-consistent policies to attract international investors.

The role of international capital markets is also emphasized in the chapters on the United Kingdom and the United States. A market-based transition towards a greening of production processes around the world must be accompanied by better information provision on the climate risk involved in respective technologies, in particular since international investors will increasingly seek to reward firms for employing advanced technologies with a lower carbon footprint. Such disclosures are of key importance for an efficient allocation of resources on international capital markets. Public policy must also aid the investment process through reliability and time consistency of the policy environment ‑ regarding the legal framework and the policy instruments ‑ within which climate investment takes place. Governments which have not yet done so could begin by announcing a clear path for emissions, with annual targets all the way down to net zero (or beyond).

Low hanging fruit of climate change policies concerning the residential housing sector is addressed in the chapters on India, Poland, and France. As one of the key measures, the chapter on India suggests to improve the reliability of electricity supply to households and to simultaneously subsidise electricity consumption for low-income households. This would induce them to switch to cooking with electricity rather than with highly polluting solid fuels. In Poland a large proportion of emissions come from burning fuels for residential heating. Policies to tackle such emissions would reduce both local and global emissions. The solution would be to reform the existing administrative process of subsidy payments and to nudge citizens with information through personalized messages to participate in existing programs that aim at replacing old coal-fuelled boilers. Likewise, the chapter on France argues that because of the carbon-free electricity in the country an efficient investment to decarbonize the economy would be an increasing installation of heat pumps for residential use to replace fuel oil.

In addition to these options for implementing efficient climate policies in the energy, housing, transportation, and manufacturing sectors, in many countries there is incredibly low-lying fruit in sequestration via forestry and agriculture. Combatting deforestation and boosting forest protection through enforcement of environment laws, tree planting and climate-friendly agricultural innovation could play an enormous role at very low cost (or even perhaps at negative cost) in the fight against climate change. Illustrations of this crucial principle abound throughout the chapters in this book, e.g., on forestry in the chapters on Brazil and Russia, and on low-hanging fruit innovations in the agricultural sector in Denmark and Argentina.  

Finally, the three chapters that deal with more general issues make the following three points. First, carbon pricing may lead to political obstacles and thus it may be better to have feebates instead which imply a levy on (a rebate for) firms having higher (lower) emission intensities than the industry standard as this encourages learning and emission reductions. Second, when a group of countries are going further in carbon pricing than trading partners, it makes sense to have a border tax adjustment mechanism. Such a “climate wall” is now proposed by the European Parliament as a supplement to the EU Emissions Trading System. Third, uniform carbon pricing across the globe is efficient but current generations and poorer, carbon-intensive countries will lose out. An intergenerational win-win for all countries is possibly if government debt is run up a little to finance transfers from future to current generations. Such transfers are also needed to make sure that all countries are on board.

Summing up

There is now a strong sense of urgency to get to net zero emissions in the next three decades, not only to limit global warming but also to reap the collateral local benefits of cleaner air and better health. Although various policies such as getting rid of fossil fuel subsidies, stopping coal production, carbon pricing including carbon tax adjustments, transfers to ensure political acceptability, and green investments are common to all countries, many of the no brainers and low hanging fruit in climate policy depend on the specific characteristics of individual countries. We hope that the detailed appraisals found in the chapters of this book will inspire policy makers. One thing is clear: the arsenal of policies that can be called upon to achieve net zero emissions is rich and varied and any delay in implementing these will invariably lead to much higher costs.

Alexander Ludwig

Alexander Ludwig

Since 2009 I am Professor of Economics and since April 2014 I am Professor for Public Finance and Macroeconomic Dynamics at Goethe University, Frankfurt.

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