Note: This transcript is auto generated and lightly edited.
JACOB: So what you saw was essentially that you had this political alliance, political coming together, of overwhelmingly national-security-oriented Eastern European countries and the traditional promoters of the green transition in the left and the center left in Europe. And it's an unbeatable political coalition.
MONICA: Welcome to Policy for the Planet, a new bimonthly podcast exploring the global response to the climate crisis.
I'm Monica de Bolle, a best-selling author and senior fellow at the Peterson Institute for International Economics, based in Washington, D.C. My work bridges the fields of economics, science, public policy, and public health–all under an international lens.
In each episode, I speak in-depth with experts to understand how governments are responding to the monumental challenges of the climate emergency. We'll unravel the complex tradeoffs of different policy choices to steer us toward sustainable practices and public well-being.
Welcome to the conversation!
Europe has emerged as a global leader in climate action, proving that ambitious environmental policies can work alongside economic goals. Through innovative approaches like carbon pricing and rapid adoption of renewable energy, the European Union has shown that meaningful climate action is not just possible — it's economically viable.
But what makes Europe's approach so effective? And how did the Russia-Ukraine war unexpectedly become a catalyst for faster green transition? Today, we'll explore these questions and examine what other nations can learn from Europe's experience.
Joining me is Jacob Funk Kirkegaard, a nonresident senior fellow at the Peterson Institute for International Economics and resident senior fellow at Bruegel. Jacob has extensively studied Europe's green transition and brings unique insights into how policy decisions are reshaping the continent's economic and environmental landscape.
Jacob, thanks so much for joining me today. I know you've been paying a lot of attention to Europe's green transition. Can you start by giving us some of the background? What have been some of the ways Europe is transitioning to a greener future to mitigate the effects of climate change? And how do Europe's efforts compare to other countries?
JACOB: Well thank you Monica, it's a pleasure to be here. That obviously is very big question but let me start by sort of the obvious thing. What is Europe doing different than pretty much the rest of, most of the rest of the world? That obviously has to do with its primary, the primary tool, policy tool with which it is promoting the green transition because Europe has as the only major economy in the world adopted a very large and indeed increasing carbon pricing mechanism. here, as well described by economic fundamentals, it's all about increasing the relative price of the polluting good, aka everything with carbon in it, to promote the production of green goods.
And I have to say, I think Europe's experiment with that, because it was an experiment when it was first introduced all the way back in 2005, has been a remarkable success, in fact. What we have now is a carbon pricing system in Europe that covers the entire electricity production sector, which has seen a very rapid decarbonization, not only coal but increasingly also natural gas-fired production capacity is being removed and obviously replaced with, in the case of Northern Europe, a lot of wind. But Europe also has a very significant revival of solar energy as well as Germany apart, nuclear energy.
All of this is very clearly driven by the carbon price. Carbon pricing also includes the major industrial producers, sorry, industrial consumers of electricity. This has been a longer process, partly by design, because for many years. Indeed it is still the case to a certain extent, industrial producers get their emission credits for free.
So they don't actually feel the pain, if you like, of carbon pricing yet. But they know it's coming and it's beginning to shift. But or it's beginning to shift in the sense that industrial emissions are also coming down. However, they are partly coming down because of a reduction in industrial production of energy intensive goods, electricity consuming goods in Europe.
There's no doubt about that. Having said that, a lot of this was also of course driven by the energy price shock, the regional energy price shock that Europe suffered after the Russian invasion of Ukraine. It sort of aggravated in some ways the energy cost issue, but also ironically or unintentionally, gave the green transition in Europe an enormous boost. Because politically, what happened in Europe after the introduction or the invasion of Ukraine was a kind of a political alliance between national security hawks and the green movement, where all of a sudden national security hawks really concentrated in Eastern Europe.
Northern Europe where, least in Eastern Europe, it's fair to say that the attention paid to climate change was perhaps not the number one item on the agenda. But national security or fear of Russia certainly is or was. So what you saw was essentially that you had this political alliance, political coming together, of overwhelmingly national-security-oriented Eastern European countries and the traditional promoters of the green transition in the left and the center left in Europe. And it's an unbeatable political coalition. And that actually saw this sort of mantra as was articulated by the European Commission president of getting out of Russian fossil fuels, which is the national security component, to get out of all fossil fuels, which is of course the green transition one. therefore, you know, obviously urgency of reducing dependency on fossil fuel from Russia has really been a major impetus for accelerating the entire decarbonization process in Europe. And you can see that, which...
There was a major reform of the European carbon pricing mechanism carried out in late 2022, early 2023, really at the peak of the energy price shock. And what happened was that you significantly tightened future reductions or restrictions on carbon emission supply. You simply reduced the number of available carbon credits, thereby driving up the carbon price further in the short run, which is in some ways the opposite of what you would have expected. You basically added on to the cost of fossil fuel, driven either electricity production or industrial production in Europe by this reform and it passed. thought it was to me it was really quite a striking example of how the war in Ukraine has been really a promoter of the green transition in Europe. And the other thing that this did, and I think this is a very important thing because when it comes to these long-term policies that are really focused on the imposition of significant, significant costs of production on, in this case, electricity,
Production and certainly industrial production you always have to worry a wonder, you know, how credible is that in the long run? I mean after the next election, you know, maybe there's another majority this will change so the political credibility of Europe's carbon pricing mechanism, I would say was really dramatically tested by the events following the war in Ukraine and I have to say that that I think the the political test, if you like, of credibility of this scheme was passed with quite frankly flying colors. So I don't think that today there is among market participants any serious doubt about the credibility of the long-term trajectory of Europe's carbon pricing mechanism. People know that supply will be reduced, supply of new emission credits will be reduced approximately 5% every year.
It will go to zero, therefore, including for industrial production by the mid-late 2030s. And prices have therefore not fallen. So anyway, all I will say is that because of carbon pricing, not only carbon pricing, but to a large extent because of carbon pricing, Europe is well on its way to meeting its 2030 global climate goals.
Emissions from the parts of the economy covered by carbon is well ahead of target and the total target for emission reduction by 2030, I believe, will be reached and it will be overwhelmingly because of carbon pricing in Europe.
MONICA: Jacob, that's all extremely interesting. So I have two follow ups for you on what you've just said. One is people, how are Europeans looking at the transition and how quickly the transition has gained speed and momentum, given the war and everything else that you described. So I would ask you to please give us a sense of how Europeans view the transition. Are they broadly on board? Is it a big issue with voters? How big is it compared to other countries? So if you could speak a little bit about that, that would be fantastic.
JACOB: Yeah, sure. I mean, think certainly in the immediate aftermath of the outbreak of the war, where literally there was a concerted push by national governments to reduce first and foremost natural gas consumption, including, you know, sort of very micro level things like, you know, turn down the temperature in offices, turn down the temperature in your own home.
You know the winter of particularly the winter of 2022-2023 You know put on another sweater. And it worked European household gas consumption as well as industrial consumption, but a household gas consumption dropped by about 20% in one year and I indeed in less than one year so and this was really partly because consumers responded.
Obviously, they also respond to very significantly, in many countries, very significantly increasing prices. But I think it was also because there was an understanding of the nature of the emergency, obviously not only related to the environment, it was also obviously very directly an outcome of the war. But what it illustrates is, I think that among the European population there is a willingness to, even when it comes to your personal well-being or the temperature of your house, you know, there is a revealed willingness to act when it needs to happen. This should certainly also, I think, indicate that those who say that, energy is different and, you know we can't impose significant changes in the relative prices of energy sources and things like that, with, for instance, carbon pricing. They're simply wrong. That actually energy is not different. If prices of fossil fuels are significantly increased, people will use less of it. That really is, you know, for economists, a very heartening experience.
This also means that if you sort of look at a slightly broader, longer time horizon, that obviously, again, the outcome of the immediate outbreak of the war was a specific political situation, obviously. But the fact that carbon pricing today is an accepted part of the European admittedly, generally, very tax and spending intensive social model, I think it's fair to say. But carbon pricing is an important part of that now and it is fully accepted. And I think a lot of people will say, well, it also is clear that relative to other sources of income for governments, carbon pricing is probably less regressive in nature than traditional VATs, for instance because it tends to focus on the richer, bigger emitters. Value added taxes and high value added taxes, by high I mean 20 % or more, so 20-25% right, is very common and these value added taxes tends to be quite undifferentiated, meaning that it is the same if you buy a luxury car or if you buy food or other essentials.
The problem with that, of course, is that as a share of their total income, the lower income groups, they consume more. They buy food, they buy clothes, they buy energy products, they have to heat their homes and turn the light on and all that. They pay, therefore, relatively speaking, a much higher share of their income in value added taxes than a rich person because a high income rich person tends to save and not spend their income to the same extent and therefore if you are a European government and you have this type of value added tax already generating revenue if you replace some of that value added tax income with an energy-based or carbon-based carbon price. Well then, high-income individuals, either because they literally drive bigger cars, they have bigger houses, they have more appliances in those bigger houses, they probably fly more and these types of things.
They spend on a per capita basis far, far more energy. And therefore, a carbon price is, you can design it in many ways, but it's essentially an additional value added tax focused on energy usage. At least if that energy usage is derived from fossil fuels. And that's why it is far less regressive. In fact, probably progressive, in my opinion, because the high-income groups will end up paying much more of it. that is, I would certainly say, one of the reasons why, in principle, a carbon price should be a source of government revenue that both can generate quite a lot of revenue. That's certainly the case in Europe, where carbon prices now are somewhere between 60 and 70 euros a ton, but also do so without hurting disproportionately lower-income groups.
MONICA: Jacob, one question that came to mind while you were speaking about the transition in Europe and how it was galvanized in a way by the war, the Russia-Ukraine war. How has the European economy fared during the transition, especially given that it was faster than previously envisioned?
JACOB: It has not been painless. I mean, there is no doubt about that. look, as I said earlier, you look at energy intensive industrial production in Europe. It is down from measured, we can debate whether that was the right starting point, but immediately before the invasion of Ukraine, it is down by about 20%. So this is not something that has just been immaculate.
There are stranded assets, are job losses, there are production plant closures and the like associated with this. There is no doubt about that.
MONICA: But people understand it, right? From what you're saying, people understand in their ….
JACOB: Well, mean, I think, yes, people understand it. And obviously, you are in those affected sectors, you tend to protest, right? You want longer transition periods, you want access to free carbon emission credits and things like that. But so saying that the green transition is all about more investment in green, of course it is also about that. But it is also about shutting down unless it can be transitioned, if you like, an electrified basis of production and that electricity is then obviously from renewable sources, it is also about shutting down polluting production. And you have certainly had that in Europe, absolutely.
But I think there is also one other related aspect where certainly in comparison to the United States, Europe, but for that matter also China is actually in a very different situation because decarbonization sort of writ large for major fossil fuel importers like the EU, like China is a positive terms of trade shop.
Of course, yes. I mean, there's no doubt that Europe will continue to have to import some critical minerals and there is a green supply chain that implies that. But compared to, in the case of Europe, a structural deficit with the rest of the world in fossil fuels, depending a little on the level of the oil price, but say 1.5 to 2 % of GDP a year.
Decarbonization is as I said a major positive terms of trade shock. This is true for China as well It is true for every fossil fuel net importer in the world At the same time, of course, the United States is not such a the US is basically neutral So in the case of the US decarbonization is a redistributive issue between you know, the fossil fuel producers and the consumers so it's not a California versus you know, Luciana or something like that.
So that's why, you know, macroeconomically for Europe, because it reduces the fossil fuel import bill, has significant long-term structural macroeconomic benefits. It doesn't mean necessarily that these are benefits that the individual consumer feels in his or her daily life.
But when you're in a government and you're making long-term forecasts and sort of thinking about, why should I accelerate this transition? Why should I focus on it? Well, if you want to cut your long-term fuel import bill to zero, well, that's probably one way to do it.
So there are many reasons why the green transition, broadly speaking, is politically easier in Europe. I like to say that part of the problem that, I mean, we know that for a fact, right? Part of the problem with getting a carbon price passed in Congress is that you've got what, 20, 30 senators from fossil producing states that are always gonna vote no, right? Well, Europe has the advantage that there is only one country in Europe, leaving aside Russia, but there's only one country in Europe that actually is a major fossil fuel exporter. That's Norway. Well, guess what? Norway is not in the EU. They just follow the EU rule so that they don't get a voice. They have enough money anyway, but that's a separate story. But the point is, politically, because Europe is a fossil fuel importer, passing a carbon price doesn't face the challenges that it obviously, historically and continues to do in the United States.
MONICA: That's a fascinating point. That is really fascinating. Let me turn over to electric vehicles because we need to talk about electric vehicles. But I would like to hear you on Europe's experience with EVs. And the fact that has been, the transition to EVs has been smoother in Europe than it has been in the United States. And any other issue that comes to mind for you with respect to electric vehicles in Europe.
JACOB: Sure. Well, I the first thing is about the EV transition. The starting point here, again, coming back to the individual relative prices faced by consumers. Look, gasoline prices in Europe are what, three to four times what they are in the United States. In many European countries, the registration cost for vehicles can be very high. And that includes the additional taxes you have to pay to drive that vehicle in urban areas. So there is a lot of ways in which European governments can incentivize the shift through various aspects of the tax system, the promotion of electric vehicles. And that has certainly been done. There is no doubt about that. And there are also many European countries that do not have a domestic car industry. So they therefore, they're not gonna be losing jobs when fossil fuel producers no longer exist. That obviously also makes it easier to go all in for the production of fossil fuel, sorry, of electric vehicle, the promotion of this transition.
Now, there are of course also important economies in Europe that are very dependent on the existing car industry and by that I of course I mean Germany, mean a number of the Eastern European member states, Slovakia, the Czech Republic, Hungary and others and therefore what you have in Europe is a fairly uneven pace actually of EV transition. You have like a country like Norway for instance.
Norway is already almost exclusively EVs. Other countries in Northern Europe are well above 50 % in terms of the new registrations. with regards to EVs, we obviously also had to talk about trade and in particular trade with China because one of the things we have seen is that the European car producers, which for many many years, and here I talk particularly the major German producers, they were very, very profitable and very, very successful in many markets around the world and especially the Chinese market.
But partly for that reason the Volkswagen's the BMW's and the Daimler's and they were not very focused really on the transition to EVs because they were making a lot of money on selling their traditional vehicles. So broadly speaking therefore the European car industry is behind the pure play EV producers, Tesla from the United States and then increasingly Chinese producers like BYD, NIO and others. And this has created political tensions within the European Union because there has been the calls for some for protection, tariffs, similar to what you have.
Here in the United States now. But I do think that it's worth making a distinction here because the calls for protection in Europe are really about protecting jobs and stuff like that in the car industry. It is not really rooted in national security considerations about electric vehicles from China.
This whole notion or idea of connected entities that an electric car is sort of a collector of data and these data might end up in China. This is much less of a concern in Europe, partly because the broader geopolitical rivalry with China is not there, but also because Europe has already an existing data protection and data retention framework that obviously electric vehicles and the data collected with electric vehicles would also have to adhere to. So data privacy is really, or data security issue is not really an issue. And then you have a third element to this, which is that because they are technologically behind on EVs and because they have to date been very successful in the Chinese market, particularly the German car manufacturers are continuing to invest heavily in the Chinese market because they both want to retain their market share there, but also because they quite frankly need to learn that needs to be some technology transfer from the Chinese EV producers to the German car producers and that technology transfer is overwhelmingly going to come by being pressed in the Chinese market.
So if you look at the data for FDI into China from all of the EU, it is heavily dominated by the car industry and heavily dominated by the three big German car makers and that is why. So therefore, and you're starting to see the opposite direction as well. You have the major Chinese EV producers BYD are now building plants in Hungary. They are likely to build one in Spain. Gili obviously bought Volvo some years ago So the Chinese EV producers are also coming to Europe if I can use it that expression so then you have a political measure by the European Commission responding to the need for protection and the obvious fact that Chinese EV producers receive a lot of subsidies from the Chinese government. So there was a very thorough investigation done by the European Commission into the extent of these subsidies and as a result the EU is now imposing anti-subsidy countervailing tariffs on Chinese EV producers, between 7%, 9 % for some and up to 35 % for others, which comes on top of the general applicable 10 % import tariff.
So there is a...if you like tariff-based move act to protect the domestic car production in Europe but I think also to quite frankly incentivize the Chinese to invest to produce cars in Europe rather than to export them from China and I think this will be very successful. Actually, it's already happening and it is of course a situation or a market development that looks quite as it's different but it looks in many ways similar to the situation between the United States and Japan in the auto sector in the 1980s where obviously the Reagan administration threatened all sorts of retaliations with the Japanese and then the Japanese began to invest heavily in the US auto sector.
Back then, you couldn't really have a full-blown trade war because at the end of the day, the United States and Japan were Cold War allies. In the same way today, you can't really have a full-blown trade war between the EU and China because of the dependency or interdependency existing in the auto industry. So you're ending up with something that is a midway where you have WTO compliant, in principle, WTO compliant anti-subsidy tariffs by the EU. Now the Chinese are going to retaliate. They have said we're going to retaliate against, you know, brandy from France, obviously a French product because it was the French who really pushed for these EV tariffs. They might also target some luxury goods from Italy. They might target others. So there will be a tit for tat trade war, it will be or trade friction. I wouldn't call that a trade war because the core, the key issue here is that, in my opinion, that this trade confrontation will be adjudicated according to WTO rules.
There is now going to be a process in Geneva between China and the EU where they will be presenting their respective tariffs and then the WTO, the new voluntary bilateral dispute the dispute settlement mechanism will adjudicate. This will take a long time. I mean, it'll take years. But the point here is that the process is designed to restrain and limit the overall extent of the trade friction. And this, of course, is very directly different, in fact, the mirror opposite of the a strategy chosen by the Biden administration.
MONICA: Yeah, I was going to say, I was going to say it sounds a lot more constructive.
JACOB: Yeah, I personally think it is because I think it's I think the Biden administration's approach of basically going for and we can debate whether it's protectionism or national security considerations for full separation between the US and Chinese car sectors. That's what we're looking at. I mean, with 100 percent tariffs, there isn't going to be much trade.
And obviously if the Chinese producers begin to build cars in the US, well maybe, I mean we don't know for sure, but I would say they're unlikely to try. And obviously as you know very well, once the NAFTA is up for review next year, the probability of exporting to the US market from Mexico will probably be greatly curtailed. What this will mean? In my opinion, is that the US, perhaps the US and Canadian, maybe all of NAFTA, EV market will be isolated from the rest of the world. And because the EU and Chinese EV markets are heading towards a very high level of integration, and that includes, by the way, at the corporate level where all of the major European producers have direct EV focused joint ventures or collaborative alliances with Chinese producers.
And therefore economies of scale in the EV sector, where sometimes you talk about, well, one of the outcomes of of the US-China geopolitical rivalry is the risk of two sets of supply chains. Well, one thing I can assure you is that in the EV sector, the supply chains and the relative economies of scale will be in the China-focused, China-EU part of that, or that set of supply chains, because that's where the scale is.
You know, the Chinese auto market is obviously considerably larger than the US one already. China is already on a month-to-month new car sales basis, over 50 % EVs, by far, by far the biggest EV market in the world. So it makes perfect sense for the Germans to say, look, we've got to be present big time in the biggest market in the world.
And they are. And this will continue. And this will, as I said, in this sector, but I think it is broadly applicable to many other sectors directly relevant to the green transition, where simply the Chinese market is the biggest in the world, far bigger than the US market. And therefore, will always be commercial logic in Europe will therefore dictate that in these sectors, that the European producers remain directly, or that trade and investment channels between China and the EU remains open. The problem, of course, politically there is that the political relationship between China and the EU is greatly strained, particularly because of the war in Ukraine and China's support for Russia. And of course, the fact that you know, NATO and 70 years of transatlantic political alliances. But it is, as I said, the commercial logic is very clearly in favor of integrating and it's happening with the between the European and Chinese EV sectors. This gives, in my opinion, much better cars, certainly much cheaper cars, much better consumer choice. And ultimately, therefore, a much faster transition to EVs.
And I think the outcome, unfortunately, therefore, is quite negative for the US. EVs will be more expensive. There will be fewer choice to have them. And therefore, the transition to EVs of the entire US auto fleet will take a lot longer.
MONICA: So big picture, now last big picture. What do you think is the most important lesson Europe has seen from the big push towards green transition and what more needs to be done?
JACOB: No, I mean, think the big thing that Europe has shown that the rest of the world should learn from is that carbon pricing really works. Carbon pricing works exactly the way, and yes, we economists said it would. If you add to the price of something, people will use less of it. And that includes the fossil fuel produced energy. It is not a special thing. It just isn't.
And then it has the advantage also that it raises revenue It doesn't cost us hundreds of billions of dollars or euros in subsidies, right? And I and it can be done Europe has done it. The first to say that look Europe started in 2020 2005 took about 15 years to figure out how this really works with regards to supply and demand of emission permits.
But there's no reason that other countries should make all those mistakes themselves. They can just learn from Europe. So that I really think is what Europe has done that the rest of the world needs to do. What Europe hasn't done yet, and partly because of its own political systems, its fiscally restrained unwillingness to invest enough, what Europe hasn't done...and other countries haven't done either. This is true in the United States, it's true in China, it's arguably true anywhere. Europe has not invested enough in its domestic electricity grid. And therefore Europe, but everyone else as well, needs to invest far more in the electricity grid to really create or make the grid resilient to the kind of variable load generation that solar obviously represents because I think solar energy is globally the it is the technology combined with batteries that will save our climate. I mean, I just think that that's that's a fact, but it won't happen unless our broader electricity grid is equipped to do so. And that requires money. And a lot of that money. Yes, it will be public investment. So it will be taxpayers money. And Europe, partly because of Europe's idiosyncratic policy making problems hasn't gotten there yet. So that is where I hope the next big push will come from in Europe and everywhere else.
MONICA: Thank you for joining me on Policy for the Planet. Have a question or a topic to suggest? Email me at [email protected]. I'd love to hear from you.
Don't forget to rate, review and subscribe to Policy for the Planet today so we can keep this podcast going! And even better, please share our show with your friends and colleagues.
Special thanks to Jennifer Owens and Alex Martin, our producers, and Melina Kolb, our supervising producer. This podcast is brought to you by the Peterson Institute for International Economics. Learn more at piie.com.
Until next time, here's to creating meaningful impact. Stay motivated, stay curious.
