December 9, 2021
Europe’s Climate Target for 2050: An Assessment
Richard S. J. Tol has done a scientific study of the costs of European climate policy. It is heavy with numbers, graphics and references so is much more careful and objective than the sort of handwaving we usually get. Because of the great detail in it, it is a very long article. So I reproduce below just the beginning and the end of it. His finding is that the cost is much greater than the benefit
Tol
The European Union has set ambitious targets for greenhouse gas emission reduction. Net emissions should fall to 45% of their 1990 levels by 2030, and to zero by 2050. What are the costs and benefits of this? Do the benefits exceed the costs?
The European Commission has not answered this question. This is unfortunate, as the decision has been made to pursue these goals. The European Commission (2020) has published an Inception Impact Assessment, which is largely qualitative.1 The in-depth analysis accompanying the Communication for the earlier, less ambitious targets does not report a cost-benefit analysis either (European Commission, 2018), even though the European Commission (2014) has continuously promoted its use. Studies by independent academics find that EU climate policy does not pass the cost-benefit test (Pearce, 2004; Tol, 2007; 2012). However, these studies do not assess the latest plans. This paper fills that gap.
Cost-benefit analysis should not dictate policy. It should inform policy along with other concerns. Yet, economic efficiency is an important criterion. If the costs exceed the benefits, all other policy demands would be harder to meet as there is less money to go around.
This paper reviews the targets set by the European Union, discusses the costs of greenhouse gas emission reduction as well as some political claims about those costs, surveys the benefits of avoided climate change and concludes by comparing costs and benefits, in total and at the margin.
Discussion and conclusion
The numbers reviewed above are sobering. The total cost of greenhouse gas emission reduction could be 3% or more of GDP. The benefits would be only 0.3% of GDP, a benefit-cost ratio of one in ten. The marginal costs and benefits give the same message. The marginal costs of greenhouse gas emission reduction would reach €500/tCO2 by 2050 while the marginal benefits would be less than €150/tCO2, a benefit-cost ratio of three in ten.
It is often argued that the impacts of climate change are underestimated. Impact estimates are certainly incomplete (Arent et al., 2014). However, arguing that the impacts are off by a factor of ten or even a factor of three is quite a stretch. In fact, the percentage above is the global average; a rich region such as Europe would be less vulnerable (Tol, 2018). The social cost of carbon is the global social cost of carbon; the EU social cost of carbon would be a fraction of this (Tol, 2019).
Besides, the costs of climate policy are underestimated too, based on the rather unrealistic assumptions of a first-best implementation in an economy without other distortions. In reality, we observe a jumble of policies, uncoordinated not just between countries but within countries as well, and sharp shifts over time as political whims and electoral fortunes come and go.
That said, the above estimates assume stringent climate policy outside the EU too. If climate policy elsewhere were more lenient, then the costs of greenhouse gas emission reduction in Europe would be lower as there would be less competition on the markets for renewables and offsets. At the same time, the benefits of climate policy would be larger. While this would improve the benefit-cost ratio, it is unlikely to make a factor of three, let alone ten difference.
It is therefore safe to conclude that the benefits of the European Union’s climate policy do not outweigh its costs. There are no immediate political implications of this finding. The European Union has put stringent emission targets front and centre of its entire policy agenda. There is little political opposition. However, in the longer term, the stringent targets are vulnerable as the costs and other implications of meeting them become apparent to a growing number of people. As climate continues to change, it will also become clear that the weather disasters foretold will not have materialised. At that point, public and political support for the EU’s climate policy will likely crumble, and result in a tax revolution as predicted by Dowlatabadi (2000) and observed with the gilets jaunes in France in 2018.
Further research is needed on all aspects of climate policy. I do not expect much progress on the economic impacts of climate change, not until the literature gets itself out of the rabbit hole of confusing weather shocks and climate change, despite previous warnings not to (e.g. Dell et al., 2014). More progress can be expected from the new empirical literature on the costs of greenhouse gas emission reduction, the somewhat belated realisation by economists that climate policy started in 1991 and can be studied ex post as well as the more common ex ante. The resulting papers suggest that climate policy is more difficult and expensive than is commonly assumed (Leahy and Tol, 2012; Fowlie et al., 2018; Lin and Wesseh, 2020; Runst and Thonipara, 2020). Yet more progress lies in the study of second-best climate policy, with studies revealing again higher policy costs (Barrage, 2020; Tol, 2020b).
Until research has progressed, the conclusion remains that the costs of EU climate policy far exceed the benefits.
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