From the political to the industrial world, a consensus finally seems to be emerging to take action on climate change. However, the consequences of an offensive climate policy on growth are causing concern. Can you really tackle climate change without harming the economy? Two experts share their viewpoints.
A discussion with:
- Yuriko Koike, Former Japanese Minister of the Environment
- Antoine Frérot, CEO of Veolia
A growing number of companies, including Veolia, are now publicly calling for a significant cost to be levied on greenhouse gas emissions. Why?
Antoine Frerot: "The low-carbon economy has a high potential for job creation"
Antoine Frérot: Quite simply because the principle of putting a cost on pollution has proven that it is rapidly effective in a wide variety of sectors, such as industrial waste or wastewater. Hence the interest of finally applying it to greenhouse gases (GHGs). In order to do so, two conditions must be fulfilled.
First, polluting must become more expensive than cleaning up. A price of 30 or 40 euros per metric ton of CO2 would make it possible to give sufficient economic incentives, in terms of demand, promoting energy efficiency measures and, in terms of supply, encouraging fossil fuels to be replaced by renewable energies. Secondly, the sums collected by taxing pollution must serve to fund cleanup actions. If we want to stabilize the amount of carbon found in the atmosphere, there is no alternative to putting a price on CO2 .
Yuriko Koike: I would add that this kind of scheme saves energy and boosts innovation, thereby opening up economic opportunities for companies. This can increase their financial worth and improve their social reputation. Provided, of course, that a fair and simple scheme is found.
Regarding the idea of a significant cost linked to GHG emissions, what does past experience tell us about the form that this cost should take?
Yuriko Koike: Directly taxing carbon involves everyone in the effort and has the advantage of appearing fair and simple. The disadvantage is that you don’t know in advance what emissions reductions will result from a given level of taxation. However, if the level is too low, the effects are zero, as Antoine has just said. But if it is too high, it can be detrimental to international competitiveness! This is why Japan chose to introduce low taxation, combined with complementary measures.
On the contrary, the “carbon market” offers good visibility on the reduction in emissions generated, as you decide beforehand on the volume of emissions to be distributed between the players. However, it is difficult to reach a consensus on this distribution in advance! Finally, let’s not forget that a third option exists: the regulatory route. This is potentially highly effective for major emitters, as demonstrated by the U.S. EPA Clean Air Act. These measures can be combined in different ways, for example exempting participants in the emissions permits market from carbon tax. However, making the system more complicated raises the administrative costs.
Organizing a global market for CO2 emissions permits in the short term is unrealistic, as this solution requires global governance.
Antoine Frérot: Organizing a global market for CO 2 emissions permits in the short term is unrealistic, as this solution requires global governance. The European experience has proven that it is not easy to put this kind of system in place: it is the most sophisticated economic mechanism ever invented to combat climate change, but it is sending derisory tariff signals, between €5 and 7 per metric ton of carbon, which does not encourage companies to drastically reduce their greenhouse gas emissions. It is much easier to set a fee on greenhouse gas emissions, establishing it over a sufficiently vast initial territory, for example the size of the European Union. I use the word ‘fee’ and not ‘tax’ because the sums charged in proportion to CO2 emissions would serve to fund emission reduction measures.
How do you bring about the necessary changes to our energy system without “killing the economy,” as some people fear?
Yuriko Koike: A fair carbon price "does not inflict an unreasonable burden on companies in the global market"
Antoine Frérot: There is no conflict between energy transition and economic growth! For example, for a new car covering 15,000 kilometers a year, a fee of 30 euros per metric ton of CO2 represents an annual expenditure of 60 euros, which remains reasonable. To those who persist in objecting that protecting the atmosphere is too expensive, I ask: how much will its destruction cost?
The low-carbon economy also has a high potential for job creation. Over and above the extensive use of fossil energies, climate change is the result of a linear economic “extract-produce discard” model that ever increasingly draws on energies and raw materials from nature.
As a result, the fight against greenhouse gas emissions requires the implementation of a model that is more restrained and efficient in terms of natural resource use, based on the principles of the circular economy. Europe could create up to three million jobs with this new economy that transforms waste into resources.
Yuriko Koike: In a certain respect, it is also possible to reduce the impact on the economy by reallocating the revenue from a carbon tax: for example, even though it is not what Antoine recommends, by using it to reduce other taxes — on companies, on income, social security contributions, VAT, etc. Which would counteract the current trend for companies to invest to gain short-term profit, without investing in the environment. What’s more, the carbon price is not the be-all and end-all: we also obtain results by raising professional awareness, improving technologies, etc.
How can you avoid penalizing companies that will be the first to be subject to a carbon fee?
Antoine Frérot: Predictability and fairness are companies’ two main requirements. Predictability, by setting the carbon price for at least a decade in order to secure companies’ planned anti-CO2 investments. Fairness, to prevent distorted competition between the economic players on whom a CO2 price is imposed and the others: the only way of ensuring fair treatment would be to establish— on entering territories that want to do more in the fight against CO2 — a tax on products manufactured in countries that are less active.
The problem is that neither shareholders nor the markets really reward the efforts of companies looking to reduce their emissions.
Yuriko Koike: The World Bank, the OECD, the G7, etc. are currently working on coordinating the implementation of a carbon cost in different regions — including Japan. Continuing these regional efforts is the key to putting in place a fair carbon price, i.e. one that does not inflict an unreasonable burden on companies on the global market.
What will be the main obstacles to overcome to put in place this new system on a global scale?
Yuriko Koike: The problem is that neither shareholders nor the markets really reward the efforts of companies looking to reduce their emissions. In the absence of a global framework, the fear of a decline in competitiveness for those who act first lingers. In Japan, there is a culture of respecting voluntary initiatives taken by countries. A tradition that is worth re-examining as it has produced good results.
Predictability and fairness are companies’ two main requirements.
Antoine Frérot: Aiming for a restrictive global agreement seems unrealistic nowadays. Although they are aware of the climate challenges, neither China nor the United States will relinquish any of their sovereignty to address them. And for the past 20 years, climate negotiations have stumbled over a single carbon price: in the absence of massive financial transfers, the price suitable for the North will always be too high for the South, while the price suitable for the South will prove too low for the North.
Today, the essential thing is not to wrest a signature from the 195 members of the United Nations, but to reach an agreement that can be accepted by the countries representing 80% of greenhouse gas emissions. To date, some 40 countries and 20 regions, as Yuriko has mentioned, have systems that attribute a carbon price. Despite the imperfections of these “climate clubs,” it would be preferable to promote them and then organize their future convergence. Much remains to be done to apply the “polluter pays” principle to carbon dioxide: carbon pricing covers barely 12% of worldwide emissions.