Putting a price on carbon – 5 takeaways from our new studies

We asked the Kiel Institute for the World Economy (Kiel Institute – Understanding and Shaping Globalization (ifw-kiel.de)) to calculate the effects of different carbon pricing scenarios. Here is a summary of the results.

Find our factsheet on the topic right here

Going it alone will get the EU only so far!

By setting ambitious climate goals, the European Union (EU) is sending an important signal in the fight against climate change. Yet according to a simulation done by the Kiel Institute for the World Economy on behalf of the Bertelsmann Stiftung, the higher carbon prices that would result would only reduce greenhouse gas emissions to a limited extent over the long term – namely by just 2.5 percent, if carbon prices in the EU rise by an additional $50. That would be the equivalent of 760 million tons of CO₂.

2) Globalization matters for climate change policy!         

The reasons for this modest outcome are Europe’s small share of global emissions and the international division of labor. Higher carbon prices in Europe cause emissions to leak to countries where carbon prices are lower. In addition, European companies initially become less competitive. Countries with less efficient industries that are highly dependent on fossil fuels are particularly hard hit.

3) A global climate club is effective and not too expensive!

Transregional (the EU together with the US and/or China) or even global initiatives for carbon pricing (climate clubs) would have a much greater environmental impact compared to Europe’s going it alone.

A global increase in the carbon price of €50 would lead to a long-term reduction in global emissions of 38.6 percent, or 11.5 billion tons. Were the resulting tax revenues to be redistributed on a per capita basis, the income effects would be moderate: just 0.5 percent of GDP per country on average.

4) An EU Carbon Border Adjustment Mechanism helps to reduce carbon leakage but that’s about it!

The carbon border adjustments planned by the EU would help reduce the shift in emissions to other countries, should Europe act on its own. The EU’s carbon leakage rate – would diminish from 14.9 to 10.8 percent.

Moreover, they would reduce the economic costs within Europe. Yet they would have very little impact on global CO₂ emissions: Instead of 2.5 percent, long-term emissions would be reduced by only 2.7 percent.

5) Go for the club – but take into account the international division of labor and share the financial burdens!

In terms of implementing an effective global climate policy, the EU, as an open economy with a high volume of emissions, should focus more in the future on its consumption-based emissions (carbon footprint) rather than looking only at production-related (territorial) emissions.

It should view carbon border adjustments as an interim response and redouble its efforts to find a solution involving a transregional or, over the long term, even a global climate club.

In implementing this solution, it should also take into account the social and economic costs for lower-income households and developing countries.

Stay tuned as we detail the results of our studies in the forthcoming blog posts.

Do you want to know more? Find our factsheet as a free PDF right here.