A 25-euro CO2 Tax Won’t Save the Climate

21 September 2020, by Junior Prof. Moritz Drupp

Photo: Benita Welter/Pixabay

By now, every country is being affected by climate change. Heat waves, storms and loss of biodiversity are changing our environment. And the social and economic damage is also enormous: crop failures, forest fires and health risks cost us dearly. How much money should we invest today, in order to mitigate the damage that will shape tomorrow?

The Paris Agreement set the goal of limiting the rise in temperature to below two degrees, and Germany plans to be climate neutral by 2050. How can this be achieved? In my work as an environmental economist at Universität Hamburg’s Cluster of Excellence Climate, Climatic Change, and Society (CLICCS), I analyze various measures for reducing greenhouse-gas emissions. One key measure is, for example, levying a tax on greenhouse gases.

If a price is put on the greenhouse gas carbon dioxide (CO₂), production costs will increase, since the resulting emissions will have to be paid for. The outcome: CO₂-intensive products will become more expensive and consumers will have to dig deeper into their pockets. Accordingly, demand for cheaper, low-CO₂ goods will increase. The same is true for the transport sector: if petrol prices rise, more will be invested in electric engines. This means climate protection will become more competitive.

Starting in 2021, in Germany 25 euros will have to be paid per metric ton of CO₂ produced by the combustion of heating or motor fuel. This means that as of January, petrol will cost seven cents more per liter. The tax will gradually be increased to 55 Euros by 2025. But does the price make sense – and is it fair? One of the underlying questions is how much we’re prepared to pay today in order to avoid climate damage in the future. To calculate this, together with an international team of researchers, I combined a climate model with an economics model. This allows us to link the emissions produced by our economy to the climate changes and damage they cause. We also incorporated a further component: the recommendations resulting from a questionnaire sent to 173 experts who are investigating how much we should invest today for future generations.

Our findings revealed the extent to which we need to reduce greenhouse gases in order to achieve optimal wellbeing for both current and future generations. This can be best expressed in terms of CO₂ prices: the higher today’s CO₂ price, the greater the reduction in emissions, and therefore, the less harm done to the climate. One thing is certain: there is no single right price; rather, there are various climate paths open to us – depending on how much value we attach to the wellbeing of future generations.

If we set high ethical standards for safeguarding our children’s and grandchildren’s world, a metric ton of CO₂ should cost 180 euros. Or, put another way, a metric ton of CO₂ should be considered to cause 180 euros’ worth of damage to humans and the climate. This is the amount recommended by the German Environment Agency (UBA), and also the price referred to by the Fridays-for-Future movement. If we take the model’s middle path, a metric ton of CO₂ should be priced at roughly 100 euros. Both sums are a far cry from the 25 euros now set. As such, the price will have to be raised significantly in order to ensure that Earth remains habitable for future generations.