Submitted by John Ploeg
Last month, I joined a lobbying delegation from France, Germany, Portugal, Sweden, the Netherlands and Belgium in Brussels to present an ambitious climate policy to members of the European Parliament and Commission. Specifically, we asked policymakers to enact a two-part solution that first puts a price on carbon pollution, and then distributes the resulting revenues to European citizens. But my colleagues and I are not professional lobbyists. We are volunteer members of an organisation known as Citizens Climate Lobby (CCL).
I learned about CCL last autumn when they came to speak at an energy conference at Sciences Po’s Paris School of International Affairs, where I am pursuing my master’s in environmental policy. The clarity and elegance of their proposal impressed me so much that I decided to join the French team at their next meeting. Things moved quickly, and before I knew it, I was calling MEPs’ offices to ask for meetings, and boarding a train to Brussels to promote CCL’s solution.
That solution is called Climate Income, sometimes known as a Carbon Fee and Dividend. It is a unique approach that is both effective at reducing greenhouse gas emissions and socially just. It works by putting a price on carbon, then returning the revenues raised to the population as an equally distributed cash payment. The price would start low but increase steadily, so that companies and people are incentivised to decarbonise, but still have adequate time to adjust.
The IPCC states that a high effective price on emissions is necessary to limit warming to 1.5℃ and most economists agree that the best way to achieve this is by directly charging for those emissions. The flexibility of this approach allows decarbonisation to be achieved with a high degree of economic efficiency. The alternative approach of across-the-board restrictions or standards would strictly mandate equal emissions reductions by all companies, even if some of them can decarbonise more easily than others. As a result, those who can reduce emissions at low cost are not incentivised to go farther than the current level required, while those facing higher costs are forced to cut earlier than is economically sensible. In contrast, carbon pricing incentivises actors to make the cheapest cuts first while solutions for decarbonising in areas where it is more difficult are still being developed. The end result is that carbon pricing can achieve the same total emissions reductions at much lower cost. For example, it is estimated that to achieve the same level of emissions reductions in individual transport, fuel efficiency standards would cost consumers considerably more than a carbon price on fuels.
This is not to say that carbon pricing is the only policy needed to solve the climate crisis. No one measure can bring about the radical transformation our society desperately needs or ensure that such a transformation is fair. For example, carbon pricing alone cannot guarantee that all industrial emissions would be eliminated by 2050. Nor can it prevent coal miners from losing their jobs. As the Commission’s Green Deal communication explains, addressing these issues requires completely realigning all of Europe’s policies with its environmental objectives. However, carbon pricing is nonetheless a potent tool within this broader set of policies for achieving emissions reductions in a cost-efficient way. Given the magnitude of the transformation called for in the Green Deal, such efficiency will likely be critical to its success.
In fact, the EU already has a policy in place to price some of the region’s emissions. This is a cap-and-trade scheme known as the Emissions Trading System (ETS). However, it covers only about two-thirds of the EU’s emissions, and at a price still considered too low to drive meaningful reductions. This conclusion is supported by the fact that fuel switching from fossil fuels to renewables in the power sector has had the greatest impact on Europe’s emissions reductions to date, but the price of an ETS allowance is still well below that needed to make such a switch economic, suggesting other forces were at play. In particular, power installations are also subject to the EU’s Renewable Energy Directive (RED), which legally requires the EU to increase the share of renewables in its electricity supply to 20% by 2020. By the end of 2018, the bloc had grown the renewables share to 18%. In other words, the EU is only doing just enough to meet the 20% target, which suggests that the RED, and not the ETS, is behind most emissions reductions to date.
However, the RED is a form of fixed mandate. It forces electricity providers to generate a predetermined percentage of their power using renewables, no matter the cost. Assuming, based on the evidence above, that the RED was the key driver of this fuel switching implies that the effective price of the resulting emissions reductions in the power sector was higher than that charged under ETS. Meanwhile, other sectors, subject only to the ETS and not the RED, were charged a lower price. Perhaps if these sectors had faced the same effective price as power generators, they might have found it economical to reduce their emissions even more.
The Climate Income solution aims to overcome these shortcomings in two ways. First, it recommends that the carbon price be applied to all fossil fuels at the source: either at the mine or well-head, or at the EU border in the case of imported fuels. The carbon content of a given quantity of each type of fossil fuel is known, so charging for carbon at the source would be relatively straightforward. As the price on fossil fuels increases, so would the price of energy produced with fossil fuels, as well as goods produced using that energy, and so on all the way through the supply chain. In this way, ‘at-the-source’ carbon pricing would create incentives to decarbonise throughout the entire economy wherever it is cheapest to do so, not just in specific sectors.
Second, while a precise price that would internalise all the externalities of carbon emissions is practically impossible to calculate, CCL does not attempt to do so. Instead, it calls for the price to keep rising until all emissions are gone. This price would start at a manageable level of €15 per ton of CO2 equivalent (tCO2e), to avoid an immediate shock, but then it would automatically increase every year indefinitely by €10/tCO2e. Within a decade, the price would be over €100/tCO2e and still rising. Because the increases are automatic, companies and consumers would be able to plan for them now.
In contrast, analyst projections for ETS allowance prices in 2030 vary considerably, with many predicting prices to end the decade in a range of €20-35/tCO2e, or relatively unchanged from the current price of €25/tCO2e. This uncertainty is extremely problematic. To decarbonise their operations, most businesses will need to make significant, long-term investments; but if the price of pollution is uncertain, and there is a decent chance it will not significantly rise, they will not have the confidence to take meaningful action. In addition, some may feel they will be able to limit the impact on their industries through lobbying for exemptions, as the aviation industry largely succeeded in doing in the past (domestic operators receive 85% of their ETS allowances for free and international flights are excluded). Consequently, many companies will not start to invest until the price of carbon is materially higher, which could be years from now, and far too late.
To grasp how this would work more clearly, consider the example of a coat. According to the French environmental agency, ADEME, an average coat is responsible for roughly 85 kg of CO2e before anyone even buys it. Based on the EU’s current emissions standards, that is equivalent to driving about 650 km. To understand this, we must analyse the coat’s supply chain. Imagine the coat is made from cotton. That cotton has to be grown, which often requires a surprising amount of energy. The cotton crop is likely fed with synthetic fertilisers, which are usually produced through the energy-intensive Haber-Bosch process, and watered through mechanical irrigation systems requiring additional power. Unless this energy comes from 100% renewables, it is responsible for significant emissions. Next, the cotton must be harvested by machines that probably run on petroleum, and then shipped to a factory for processing, which consumes more energy. This could continue through several nodes along the supply chain, which may span multiple countries. Eventually the coat is shipped to the country where it is sold, and delivered to the store or customer. These extraction, production and distribution emissions add up to an average of 85 kgCO2e.
There are multiple ways to decarbonise this supply chain. Cotton could be sourced from farms using lower-carbon inputs, such as natural fertilisers; supply chains could be shortened and logistics improved to cut down on transport emissions; factories could install cleaner technology; and so on. Some of these options will be more expensive than others but, faced with consistent and certain carbon pricing, firms will enact all options to reduce emissions that save them money versus paying for those emissions wherever this occurs in the supply chain. At the same time, knowing the carbon price will rise, they will invest in technologies for deeper emissions reductions and implement them as soon as they are cost-effective.
Europe’s current approach, combining the ETS for certain sectors with a patchwork of command and control regulations for others, also creates complications for the European Commission’s plans to introduce a Border Carbon Adjustment (BCA). The basic idea of a BCA is relatively simple: estimate the carbon emissions that were generated abroad in the production of an imported good, then charge for those emissions when the good clears customs at the EU border as though they had occurred domestically. In practice, however, this can be difficult. Europe’s domestic carbon price under the ETS can change from one moment to the next and does not charge for as much as two-thirds of the EU’s emissions (in part because many firms receive allowances for free). This adds to the challenge by making it harder to determine a fair BCA price. The CCL proposal would eliminate both issues. First, it calls for a consistent carbon price applied to all sectors with no exceptions or variations. Second, the price is fixed throughout the year and steps up annually by a set amount on a specific date, so it can be determined at any point in time and accurately predicted in advance.
In summary, a steadily increasing, economy-wide carbon price is needed. However, at least initially, this would lead to higher consumer prices. Eventually, costs will decrease as more resources are devoted to developing clean technologies, and they are deployed at greater and greater scale. For example, the cost for utilities of installing solar PV (the primary technology used to generate solar power) fell roughly 77% from 2010-2018 as projects grew in size and businesses rapidly came up the learning curve. In the near term, though, many products will become more expensive.
It is important to note that this inflationary effect is not unique to Climate Income. Any meaningful policy requiring businesses to decarbonise quickly will lead to higher prices, as much of the technology needed to do so is still expensive. The difference is that CCL’s proposed carbon pricing would minimise these costs because it is designed to encourage emissions reductions wherever they are most economically efficient. Still, something more must be done to ensure that price increases do not unfairly burden lower- and middle-income households whose living standards would be significantly affected.
That is the purpose of the second pillar of Climate Income: the revenues collected through a carbon pricing scheme should be redistributed equally to all citizens. As the price differential between carbon-intensive and carbon-light products increases, families will be incentivised to spend this extra income on the latter wherever possible. This will in turn incentivise businesses to produce carbon-light products, which will become increasingly competitive.
More importantly, most families will end up better off once both pillars of Climate Income are taken into account. This is because the goods and services consumed by the wealthiest 10% of the world’s population are responsible for half of greenhouse gas emissions. This is true even within advanced economies. In the US and France, for example, the top 20% of income earners were responsible for 75% of the countries’ consumption-based emissions in 2010. Consequently, most of the wealthiest households would pay much more into the system (indirectly, through higher prices on the goods they consume) than they receive back, but the large majority of the population, especially those in the lower and middle income brackets, would end up with a net benefit (while it is true that such households often spend a larger percentage of their income on energy-intensive products, their absolute energy consumption is still considerably lower on average than wealthier households).
Recall the example of the ’embodied’ emissions in a typical coat. Now consider the shoes, the pants, the shirt, etc; not to mention the washing machine to clean them, the phones and gadgets in their pockets, the extra heat and power needed by the home that now has to be bigger to allow its residents to store all of these things, etc. And because every product has a carbon footprint, it is not necessarily the people who drive the most who emit the most. In fact, road transport (including freight) is responsible for only 21% of Europe’s overall emissions. Instead, it is the households that consume the most that are typically responsible for the most emissions – and these households are generally the wealthiest.
Perhaps unsurprisingly, then, economists are strongly in favour of Climate Income. In January 2019, an open letter advocating for such a policy was published in the Wall Street Journal and signed by more than 3,500 economists, including 27 Nobel Prize laureates, the last four chairs of the US Federal Reserve, and two former US Treasury Secretaries (one Democrat, one Republican). It was the largest joint statement by economists in history. Further support came from the IMF in a report released in October 2019. In fact, even much of the business community supports the approach. In 2017, several major firms, including oil majors such as Exxon, BP, Royal Dutch Shell and Total, openly endorsed the concept, citing its effectiveness and transparency compared to other policies.
Climate Income is gaining traction worldwide. In 2008, Switzerland enacted a more limited version of the policy. By 2014 the country’s CO2 emissions had dropped 18%, versus only 5% during the six years before the policy was enacted. Separately, the Canadian province of British Columbia saw its emissions fall 3.7% from 2007-2016 while its economy grew 19% over the same period, following the introduction of a similar policy in 2008. More recently, in 2019, Canada passed a nationwide law resembling Climate Income, which helped Justin Trudeau’s party retain its hold on power in that year’s elections. Meanwhile, in the US, a similar bill, the ‘Energy Innovation and Carbon Dividend Act,’ has been put forward with bipartisan support. But in Europe, efforts have only picked up more recently.
To try and change that, CCL representatives travelled to Brussels for the first time last November to hold meetings with a dozen MEPs on the environmental committee. During our second trip in February, we met with another 21 MEPs from all the major parties, as well as representatives from the Directorate Generals for Climate, Trade and Tax. We have also recently launched a European Citizens Initiative, which would automatically put our proposal in front of legislators if it reaches one million signatures, although it still has a long way to go.
With six people, the French contingent was the largest in the delegation. ‘In France, we are not even a year old, so I am very happy to see what a big role we are playing,’ says Sidonie Ruban, a co-founder of the French chapter. ‘We started our meetings with a group of friends in September, but we now add new volunteers every month. The people who have joined are truly passionate and everyone has something to offer.’
While many CCL members are involved in other organisations too and the group often participates in mass protests, its core approach is one of direct engagement. ‘We are different from a protest group because our primary activity is meeting directly with leaders one-on-one,’ explains French delegate, Antoine Pietri. ‘And we are concentrated entirely on the specific policy of Climate Income. We don’t think it’s the only policy needed, for sure, but for our group, it’s the one we’ve chosen to focus on. We’ve developed a lot of the details, so it’s a very concrete proposal that can actually be enacted if it gets enough support.’
CCL’s message seemed to resonate in Brussels, and not just within a specific party or group. ‘I was surprised at how well we were able to engage with the MEPs,’ says Victor Talpaert, another member of the French delegation. ‘Many were very interested in the proposal, but all for different reasons. Everyone liked that it helped mitigate climate change, of course, but some really liked how it benefited consumers, while others focused on the potential to create jobs by giving families more disposable income to spend.’
Although young, the organisation is growing quickly. For me, it is especially inspiring to see volunteers from so many EU countries joining forces. They are all ordinary people with day jobs who are learning as they go. Motivated by principle, not profit, they are eager to make a difference and willing to put in the effort to ensure it is not just paid industry lobbyists that leaders see across the table. My experience in Brussels convinced me this effort will pay off. Many of the conversations we had with policymakers were extremely fruitful, and gave me hope that our proposal, or one like it, stands a real chance of becoming reality.
We urgently need to move on from long-term pledges to concrete policy action. But achieving net-zero emissions will certainly not be easy. So for those policies to succeed, they need to minimise costs, give businesses the confidence to make long term investments and ensure a just transition – one where the most fortunate contribute their share and the least fortunate are not asked to shoulder more than they can carry. That is exactly what Climate Income can offer.
To find out more, you can visit the French chapter’s website, or follow the group on Facebook (@LobbyClimatiqueCitoyen) and Twitter (@CCL_France). All are welcome and your commitments are entirely up to you, so if the solution interests you, feel free to join a meeting.
John Ploeg is a member of Citizens Climate Lobby. He is currently pursuing a masters in environmental policy at Sciences Po’s Paris School of International Affairs, having previously worked in the financial industry in the US and the UK.