Europe’s Green Deal Is Great, Unless It’s a Backdoor to a Planned Economy

(Bloomberg Opinion) -- Two cheers for the European Union, which on Wednesday embarked on the world’s most ambitious effort to ameliorate climate change. Ursula von der Leyen, president of the European Commission, revealed her goal to make the EU carbon neutral by 2050. We need visions on that scale to save our planet.

But let’s hold the third cheer for March, when the details start coming out in reams of legislation that will eventually touch every aspect of Europe’s economy and society. For the challenge is not only to limit warming, but also to align this massive state intervention with the EU’s market economy —  to assure human survival but also prosperity. The EU mustn’t accidentally slide into central planning, especially if others — China, India, the U.S. — are ever to emulate the effort.

State intervention is certainly justified. The ongoing rise in greenhouse gases is history’s most terrifying example of what economists call an “externality,” a cost not reflected in the price of goods and services because it is borne by third parties, which in this case is all of us. This means that the best policy is to make the externality visible in prices. All prices. And the best tools for that are taxing carbon or putting a price on it.

Europe already uses both tools, though insufficiently. It has an emissions trading system, for instance, in which polluting industries, such as cement makers or airlines, buy and sell allowances to emit greenhouse gases. This gives them an incentive to make their production cleaner, so they need to spend less on certificates or get paid for selling their allotments.

Von der Leyen’s best idea is to dramatically expand this system. The allowances for airlines, who are among the worst polluters, will be cut, raising their carbon costs (and thus ticket prices, which should lead to less flying). Shipping will also be included. Henceforth, firms in ever more industries will have to invest in technologies to cut emissions in order to stay competitive. This is market economics at its best.

The same policy also shows how intervention smashes into other economic values, such as free trade. Europeans already “consume” more carbon than the EU’s firms emit. You can view that as the EU “importing” carbon from other countries, or “outsourcing” emissions to them. If the EU were now to raise carbon prices only in Europe, EU firms would become less competitive relative to the world’s, and even more carbon would be imported. Some Europeans would lose their jobs. And the earth wouldn’t benefit.

That’s why Von der Leyen is right to plan “carbon border adjustments.” These are basically tariffs on imports based on how much greenhouse gas was emitted in their production. That sounds simple but contains political and logistical dynamite. Measuring the carbon in stuff made inside the EU is already difficult. How exactly will we account for the goods from elsewhere?

As to the politics, a case could be made to the World Trade Organization that the new tariffs do not discriminate. They simply aim to put firms inside and outside the EU on similar footing, without changing their relative prices. But try telling that to China or the U.S., at a time when they’re already waging trade skirmishes.

In principle, a high enough carbon price (or tax) should be enough state intervention, because consumers, producers and investors would all adjust to that signal. But Von der Leyen wants to go far beyond price signals, and that’s where it gets tricky. In particular, she wants to make available — how is unclear — an additional 260 billion euros a year indefinitely.

It’s certainly fine for the public sector, including the European Investment Bank, to fund basic research. After all, that’s how the internet, among other things, was invented in the U.S. But governments are no better than private investors, and usually worse, at picking winning technologies. Should the EU lead in battery production? Perhaps. But maybe fuel cells are the future, or something else we can’t name yet.

Governments should certainly never pick winners among companies. But that’s the risk in vague promises to subsidize, support or otherwise coddle “European champions.” Von der Leyen promises an “industrial policy” that’s allegedly necessary to fight climate change and to compete with China and the U.S. In practice, firms will compete more as lobbyists than as innovators.

That’s also the problem with the Commission labeling certain firms as environmentally more virtuous, in order to privilege their securities as “green bonds.” There’s even talk about the European Central Bank, which is already buying 20 billion euros worth of securities a month to keep interests low, to favor green ones (over the “brown” sort?). But that would exceed its mandate, which is to preserve price stability. It has no business guiding an ecological transition.

If Von der Leyen wants to help green, or any, innovators raise money, she has better options. One is to complete the long promised “capital markets union.” Another is to perfect the so-called “single market,” which may exist for goods but not many services. If firms can get funding from, and sell to, the whole EU, they will thrive faster and greener.

Von der Leyen is on firmer ground again when she proposes a “just transition fund” to the tune of 100 billion euros over 7 years. All change creates winners and losers, and this is the biggest since the industrial revolution. To maintain social and political cohesion, government must compensate the losers. In the EU, that means buying off countries like Poland that still rely on coal for their energy. Even so, you can expect the Poles to resist the Green Deal at this week’s European summit.

The existential challenge of our time is to reconcile ecology and economy. To do that the EU, and the world, should aim for as much market as possible and as much state as necessary. The solution, if humanity finds one, will lie in our ability to change our lifestyles and to innovate: by finding ways beyond planting trees to suck carbon out of the air for storage; by redesigning cities so we move around more efficiently; by using less energy and getting more of it from the sun and wind; and much, much more. The Commission must let, rather than make, that happen.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andreas Kluth is a member of Bloomberg's editorial board. He was previously editor in chief of Handelsblatt Global and a writer for the Economist.

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