Summary & Policy Recommendations by Yannis Eustathopoulos, Coordinator of the Sustainable Development Observatory, ENA →

  • The European Green Deal is a strategy that can make a substantial contribution to achieving the objectives of the Paris Agreement and to protecting the environment by demonstrating the leading role that Europe is called upon to play in addressing the global climate threat of the 21st century.
  • However, the achievement of climate goals is seriously called into question by the lack of financial resources. The investment gap to meet the EU’s climate targets has been estimated to be at least €350 billion per year up to 2030, without taking into account the financing needs for a range of climate and environmental objectives.
  • The European Commission recognises that the European budget is unable to cover the massive investments needed to meet the climate targets, which calls for assistance from both Member States and the private sector. This makes the directions and choices to be taken at the level of economic policy crucial.
  • Despite widespread recognition of both the uncontrollable risks posed by the intensification and acceleration of climate change and the scale of the financing gap for climate action, there is a general reluctance to contribute to financing the climate transition. Both fiscal and monetary policy makers and the private/financial sector cite prioritize the need to deleverage the economy and reduce risks associated with higher levels of debt or taking a more active role in the economy. There is no consensus on a substantial change in the orientation and rules of economic, monetary and development policy in order to make a greater and more direct contribution to achieving the climate objectives.
  • Given the strong reservations expressed about the prospects for a change in economic policy directions and effective participation in financing the transition, the solution advocated by international organisations focuses, inter alia, on pricing and taxing carbon-intensive activities and products (carbon tax).
  • Overall, market-based mechanisms such as carbon taxes, emissions trading schemes and green/sustainable finance products are presented as the most appropriate and effective policies to support climate transition. These policies are considered to ensure both the preservation of market flexibility and the lowest possible cost of achieving climate objectives. In this context, the possibility of a total/partial return of carbon tax revenues to citizens to offset the social impacts of the climate transition or for development and investment purposes is highlighted.
  • However, there is no broad consensus that market mechanisms and carbon pricing are undeniably the most and only effective economic policy options. A review of international literature points to various arguments questioning the relevance of market-based mechanisms and their overall effectiveness. In summary, carbon taxation, as the dominant/exclusive instrument to support the climate transition, does not seem to ensure three key conditions for a just transition, namely a) its proven adequate contribution to achieving climate goals b) ensuring the fairness and social support for the transition c) ensuring the resilience of the economy against shocks.
  • In particular, it is stressed that the carbon tax – if used as a predominant tool to support the climate transition – carries the risk of a double shock: a) a social shock, due to the very high or even unmanageable increases in energy costs for consumers and especially for the lower income groups due to the regressive nature of the tax, but also for rural and peri-urban residents, b) a productive shock, i.e. at the level of the real economy and employment, with the potential risk of creating large and persistent pockets of mass unemployment in coal-related regions and carbon-intensive skills/professions. At the same time, the prospects for a substantial contribution from green finance products are subject to a number of weaknesses and risks: insufficient certification implying greenwashing practices, the risk of being transformed into purely speculative instruments, the inability to support socially useful infrastructure, technologies and projects that do not meet market return on investment norms.
  • Overall, the fact that mainstream policy proposals do not take into account the already extremely high and widening inequalities of income and wealth and their adverse effects on developing countries is a matter of particular concern. Fairness and a broad public and political consensus on the policies to be implemented are emerging as vital conditions of a successful climate transition. These policies cannot be based solely on cost-benefit exercises, requiring that political economy dimensions be taken into account. The design of equitable transition policies must adapt to the overall conditions prevailing in each country, from the national to the local level. In this direction, addressing inequalities is an essential starting point for designing effective climate policies with a high probability of success and social acceptance.  Overall, an examination of international literature confirms that addressing an unprecedented challenge such as climate change, which requires radical changes at the global level in an environment of deep and widening inequalities, calls for the mobilisation of solutions and instruments that go beyond the usual policy framework.
  • Good international practice at the level of applied policy confirms that climate change cannot be approached solely as a market failure. Tackling climate change requires: a) profound changes in deeply embedded lifestyles, b) prioritising broader socio-economic criteria over short-term economic objectives, and c) increased international coordination for the common good. The carbon tax, where it has been implemented, has been developed in countries with a high degree of trust in institutions and on the basis of a long period of preparation and consultation with the aim of integrating this measure into a broader social contract and into a more comprehensive policy mix including measures such as the introduction of product standards/specifications, local spatial-environmental planning, innovation policy, education policy, economic incentives, etc. This not only brings the concept and tools of long-term development planning to the forefront, but also raises the urgent need to seek new approaches in the field of economic policy, capable of ensuring environmental, economic and social effectiveness at the same time.
  • Based on the above findings, ENA’s Sustainable Development Observatory puts forward a set of 10 priorities aimed at developing a holistic policy to support climate transition:
  1. A robust increase in Public Investment policy is urgently needed to deliver critical investments in physical and intangible infrastructure necessary to change production activities and consumption patterns and to make renewable energy and green technologies more affordable and efficient
  2. Implement a progressive tax reform & tackle international tax evasion to close the climate transition financing gap
  3. Upgrading the role of Central Banks and formulating a green monetary policy
  4. Taking full advantage of Development Banks to support investments with high social and environmental value and manage change in fossil fuel-based regions
  5. Balanced and effective use of environmental taxation and carbon taxation and market-based mechanisms
  6. Streamlining and optimising subsidies to households and businesses for green investments
  7. Freeing green innovation from the constraints of market failures – Establishing an ambitious policy to support R&D
  8. Support environmental innovation through green rules and standards for products and services (green public procurement, etc.)
  9. Strengthening the Circular Economy sector to reduce greenhouse gas emissions
  10. Establishment of local productive reconstruction plans for regions and sectors affected by the climate transition.