Should the EU Adopt a Higher Carbon Pricing – Going Up With That?
Guest essay by Eric Worrall
The Economist has criticized the European Union for not going far enough with its green initiatives.
EU green rules will do too little to tackle climate change
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To the rescue, the European Union has invented a new labeling system, or classification system, that aligns the economy into activities it deems environmentally sustainable, from the installation of heat pump to anaerobic decomposition of sewage sludge. The idea is that funds and companies will use this to reveal which parts of their operations qualify as green, and that clarity will help free up large amounts of capital from the markets. Proposals have been in the works for years, and on December 31, the European Commission released its latest thinking.
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The plan’s flaws lie in its bureaucratic outlook. The simple nature of the labeling can lead to a purity test in which the fund excludes dirty assets. In fact, the main job of the capital markets is to own the polluting companies and manage their emissions. The classification is static, while changes in technology will reduce the carbon intensity of some activities and lead to inventions that taxonomists have not yet envisioned. It fits a pattern of well-meaning but insignificant European climate finance ideas, including the use of the European Central Bank to buy green bonds (which may exceed its mandate). its assets) and impose green “stress tests” on banks, even though their asset lifespans are shorter than the horizon for the most significant climate change.
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The EU’s broader goal should be to use carbon pricing to change the way capital is allocated. Relying on investors to save the planet using a classification approach has clear limits. Less than a third of global emissions come from companies that are publicly listed and controlled by institutional investors. And investors have no clear incentive to go green. If you don’t mind the stigma, owning polluting properties can be profitable, which is why they are increasingly privately held.
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The EU had a record high carbon price at around €70 (USD$80)/ton. Clearly The Economist thinks more pain is needed.