The most recent report by the Intergovernmental Panel on Climate Change (IPCC, 2019) suggests that the current trajectory of the global economy with its high level of carbon emissions is incompatible with the goals of the Paris Climate Agreement to keep temperatures from rising by 1.5 degrees or more above pre-industrial levels. As the authors of the report state, it is therefore reasonable to argue that the current form of market-based emissions trading has failed. The EU-ETS, which is still the largest emissions trading scheme in the world, has produced prices for carbon that are too low and too volatile to achieve a transformation of the European economy.
Researchers and policy makers have therefore suggested alternatives and additions to the existing emission trading schemes. Some of the options to combat market and regulatory imperfections are described below:
- A price floor: According to recent research, emissions trading schemes need to be augmented by a price floor (Edenhofer, 2017). Setting a minimum price on emission allowances could address the market distortions arising from short-sightedness and regulatory uncertainty by simultaneously raising short-term prices and signaling a commitment to stick to the long-term emissions cap. This could avoid a hockey stick scenario, under which prices rise slowly in the beginning but then accelerate in the future.
- A carbon tax: Policy makers and economic experts have recently stepped up their discussions over the possibility of a tax on carbon emissions. The German Council of Economic Advisors has suggested that a carbon tax could supplement the existing EU-ETS and would be relatively easy to implement (Sachverständigenrat, 2019).
- Investment in infrastructure: Putting a real price on carbon might not be enough to bring about a zero-carbon economy; it will require large-scale public action and investment to create the necessary infrastructure. For that to happen, climate policy will have to be integrated into governments’ overall economic strategies.
- Fair transition: Since the yellow vest movement in France there has been intensive debate over how to design climate policies that also help address today’s other main paradigmatic challenges such as the rising income gap between the rich and the poor. For example, this may lead to strategies in which lower income groups are disproportionally compensated for increases in carbon prices.
- Defining the challenge in a broader manner: As climate economists Michael Jacobs and Laurie Laybourn-Langton argue in recent work for the Forum New Economy, there is much more to be protected than just the climate. A broader approach should also integrate the risks of species extinction, air pollution and other environmental dangers.
Read Part 2: Greening Prosperity: What went wrong?
Read Part 3: Greening Prosperity: New Economy in Progress