Urgent need to re-energise Europe’s approach to climate change

The market won’t save us from the twin crises of nature and climate, regulation will.

Commission Vice-President Frans Timmermans said as much in his opening address to the IUCN World Conservation Congress, which was held in Marseille last week. “This may come as a really big surprise to many who were very much committed to the neoliberal economic model”, he added.

Indeed, many economists have described climate change as an example of market failure. Those who, like Sir Nicholas Stern, have been updating the impact of the latest climate science on economics, realise that the consequences are far more devastating than were previously thought.

And when markets fail, the need for collective action kicks in. Democratic policy, as Timmermans notes elsewhere in his speech, must reflect a “collective responsibility” for society as a whole.

Such a stark statement might have raised eyebrows only a few years ago whereas now it is accepted as almost completely mainstream. Economists and central bankers are on the same page. Central banks spent a decade fixing the faults of the financial system after the 2008 crisis. Today all eyes are set on a longer-term challenge, improving the climate resilience of the financial system and the global economy.

Stopping climate change “requires strong political determination” and commitment. ”Responsibility” lies with “national governments”, the only institutions that “can incentivise ‘green’ investments, levy taxes on carbon and impose limits on the amount of allowable emissions”, according to Ignazio Visco, Governor of the Bank of Italy.

Central banks must do their part to tackle the climate crisis while the ECB “must adapt its macroeconomic models to integrate climate change risks into monetary policy”, Isabel Schnabel, an Executive Board member, argues. European banks are not ready for the upcoming, historic, climate stress tests. We expect “greater information on the exposure of individual companies”, as well as clarity on the “sustainability of financial products” to ensure that climate risks are “adequately priced”. As Christine Lagarde, head of the ECB, pointed out in a speech on 25 January 2021, the “true social and environmental cost of carbon” must be included in the prices paid by all sectors of the economy

The European experience proves that regulation is a key driver of environmental innovation. Technology, however, is a part of the solution. Nature is our best ally. The Commission is to present a new environmental package by mid-December, including proposals to protect biodiversity.

For decades, classical economic theory and econometric models have grossly underestimated the economic impacts of the crisis. Models do not capture the real cost of exhausting non-renewable natural resources, nor that of externalities. What’s even worse is the fact that the models systematically ignored the risk of overshooting the tipping points that would impact all planetary sub-systems with fatal consequences. “It’s the economy, stupid” someone famously said. Right, but the math was wrong.

Economist William Nordhaus won the Nobel prize “for integrating climate change into long-run macroeconomic analysis”. While he was among the first to call for a carbon tax, his models are flawed. For him, an increase of 3.5 degrees by 2100 might be an economically desirable outcome. The “cost-benefit optimum”, that is the optimal result of a cost-benefit analysis of the economy of climate change, would be reached with a global temperature rise of 4-degrees Celsius by 2150.

This might constitute a theoretical construct of the utmost elegance. However, the science is clear. A rise of over 3 degrees would make large parts of the world simply uninhabitable. It is therefore unfortunate that the DICE model (Dynamic Integrated Climate Economy model), that is the basis of the Nordhaus Integrated Assessment Models (IAM), somewhat paradoxically concludes that a 6-degree rise would cause a limited loss of 10% of global GDP.

To put this into perspective, a 6-degree world is a scenario so extreme that it’s almost unimaginable. Thus, not many studies have addressed it.

Then, what is the real social cost of carbon? The question is still hotly debated. One thing we know for sure: “if everyone lived as we live in Western Europe, we would need three planets”, according to Timmermans.

Every year we consume 100 billion tonnes of resources. Water and food security are also at risk. This is the rationale behind the shift towards a more circular economy. Use fewer resources; and use them better. Reduce waste. In China, where the principle of the “ecological civilisation” was inscribed in the constitution in 2018, food waste is now severely punished. Single-use plastic for food delivery has been banned since January.

For the EU, access to resources and raw materials – primarily for energy transition – is tantamount to strategic autonomy and security.

Adaptation measures are needed for food and water systems. Multiple crops and livestock production are set to decrease, and may even disappear in parts of Southern European regions, the European Environment Agency maintains. Agricultural productivity’s growth has been slowed by climate change globally.

In January, the Dutch Parliament approved a law to curb emissions and nitrogen levels from the agricultural sector. Politicians are now considering forcing farmers to cut their livestock by 30%. In Germany, 34 university canteens in Berlin have gone vegetarian. Meat and fish can still be found in only 4% of the dishes served. It was student demand that led to the shift.

The fight against climate change is a societal – and generational – issue and not “just” a technological problem. It touches upon important factors, ideas, models of consumption and ways of life.

Climate deniers can’t be dismissed as a nuisance and a danger anymore. After decades of fighting the damaging lies, the science has finally won the battle. The risk today comes from fatalism –there’s nothing left to do; the catastrophe is inevitable scenario– born of resignation, apathy and economic insecurity.

The lessons from the yellow vests in France must not be forgotten. We need education, plus communication that showcases success-stories, while providing for accessible, convenient, alternatives to services and products that will be phased out. Above all, we need a structural approach to rebalancing national and global fiscal systems.

The almost inevitable, temporary increase in the cost of electricity in the EU needs to be offset by removing improper tax burdens that aren’t directly related to energy production and shifting the burden to carbon-intensive factors.

Rising fuel prices will have to be met by improving public transport. By 2024, Germany will invest 1.25 billion in electric buses and charging infrastructure. With the EU’s blessing, this is the way to go, the only way to go.

This article is also published on BrusselsMorning. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.