A reform of EU ETS could result in nearly 3 billion more euros for Greece

Debt-ridden Eurozone countries could become more competitive through carbon pricing.


May 21, 2013, Berlin. With a reform of the European Emissions Trading System (EU ETS), the economically troubled countries of southern Europe could increase their revenues by several billion euros per year while also increasing their competitiveness. This was the finding of an analysis conducted by the Mercator Research Institute on Global Commons and Climate Change (MCC). The study estimates that Greece could see its budget increasing from 150 million euros to 2.7 billion euros—enough to avert having to take on new debt. Spain stands to gain 6.2 billion euros and Italy 6.9 billion. For the European Union as a whole, the current revenues of 3.55 billion could rise to about 64 billion euros.

“Especially in southern Europe, several states are so deeply in debt that their finance ministers would do well to put a higher price tag on carbon instead of taking the familiar route of taxing labor or capital,” says MCC Director Ottmar Edenhofer, who is also chief economist of the Potsdam Institute for Climate Impact research (PIK). “Eventually, this could also improve the international competitiveness of these countries. This applies especially to countries that are having difficulties to actually collect nominal taxes on labor and capital due to sizeable informal sectors in their economies.”

Such a reform of the EU ETS would need to include the following three main changes: One, the minimum price for an allowance must not go below 20 euros per tonne. Two, emissions trading must be expanded within the transport and building sectors. And three, the volume of free allocations of allowances must be considerably reduced. As a result, about 80 percent of allowances would likely be auctioned, instead of the current 40 percent.

The above findings of the study are also of interest in the context of the European climate policy debate: The EU has set itself the goal to reduce its CO2 emissions to 40 percent below 1990 levels by the year 2030. However, because the price of carbon permits has plummeted, coal-fired power plants are increasingly driving gas power plants out of the market. In 2013, for example, in Germany, electricity production from brown coal (lignite) has reached its highest level since 1990.

With a view to the global situation, the MCC would like to see groups of countries, such as the EU, become independently active as pioneers. “With the additional revenues, government debts could be reduced and money could be put into health care, roads, pension plans, unemployment insurances, or wages and salaries in the public sector,” says Christian Flachsland, head of the working group Assessments and Scientific Policy Advice at the MCC. “In the long term, climate protection from the bottom up could prove to be the faster and more effective solution than the constant waiting for a global climate regime to get underway.”

The MCC moreover considers that carbon pricing could potentially break the global downward spiral in capital taxation. This would give companies locational advantages for those countries. However, this would require, among other things, that the new revenues are actually flowing into infrastructures that strengthen the economy.

The MCC explores sustainable management and the use of common goods such as global environmental systems and social infrastructures in the context of climate change. Five working groups conduct research on the topics of economic growth and development, resources and international trade, cities and infrastructure, governance and scientific policy advice. The MCC was jointly founded by the Mercator Foundation and the Potsdam Institute for Climate Impact Research (PIK).

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On Wednesday, May 28, Martin Weitzman, economics professor at Harvard University, will give a talk at the Elinor Ostrom Hall of the MCC entitled “Why is the Economics of Climate Change so Difficult and Controversial?” Weitzman is a Fellow of the Econometric Society and of the American Academy of Arts and Sciences. More recently, he was also made a Senior Fellow at the MCC.