PROVIDING FURTHER ECONOMIC LEGITIMACY TO THE CLIMATE CHANGE CONSENSUS
COP21: A diplomatic success—no binding commitments or carbon pricing. The COP21 Paris Agreement includes (i) an objective to limiting the average global temperature increase to well below 2 degrees C above pre-industrial levels” and “pursue efforts” to limit the temperature increase to 1.5 degrees and (ii) commitments by countries to take stock of their domestic climate change plans starting in 2023 and every five years thereafter. However, developing countries opposed the idea of a standard for declarations of future steps taken on climate action. Negotiations leading up to the agreement resulted in Intended Nationally Determined Contributions (INDCs)—countries’ long-term carbon abatement objectives. These commitments, however, lack in ambition, and are hampered by legal challenges (VoxEu, Robert Stavins, Nick Stern). According to the IEA, the path set by the INDCs submitted by countries is consistent with an average global temperature increase of around 2.7 degrees. The agreement has two major shortcomings—it does not price carbon, and neither advanced countries’ commitments to financial support for developing countries nor the INDCs are binding (Jean Tirole). For Domenico Favoino and Guntram B. Wolff (Bruegel), the market reaction to the deal suggests that its credibility still needs to be established.
The agreement is raising scope for low-carbon technology. For Paul Krugman, renewable energy could be expected to experience further expansion in the years to come (Financial Times), as environmental-friendly technology and climate finance are now the economically-sound option. The COP21 agreement is a necessary first step for private and public investors to make long-term investment in environmentally-sound economics, according to Simone Tagliapietra and Georg Zachmann (Bruegel). This pragmatism is essential as the intangible costs require pressing solution (The Economist).
COP21 will revitalize the EU’s “Energy Union.” The European Commission has suggested the need for an Energy Union, ever since the Ukraine-Russia crisis. Five main dimensions of the Union are necessary: energy security; integrated energy markets; energy efficiency; decarbonisation of the economy; research and innovation. Since supply security has profound geopolitical implications, revamping the European energy market is necessary to avoid the redundancies of local energy competition and balance Russian influence on the markets (Bruegel).
Europe could take the lead on climate finance. While climate finance provides economically efficient environmental policies. For Luis Alberto Moreno (Project Syndicate), a major obstacle to greater participation in climate finance among capital-market players has been the dispersion in demand. A green bond, possibly issued in Europe, could boost economic and energy efficiency and give the EU crucial leadership on climate, as defended in a Bruegel Policy Brief.
Europe’s cap-and-trade system, EU emissions trading scheme (ETS) is both the EU’s “flagship” climate policy and an example of difficult commitment to long-term environmental economic goals. The EU used an incremental system to seek broader consensus on and commitment to the project. The quick take-up reflected the “entrepreneurial role” of the European Commission in the early 2000’s (see Egenhofer, Skjaerseth & Wettestad). The ETS provides an example of cutting emissions, while retaining in principle competitiveness (Demailly & Quirion, Meunier et al.). Critics of the EU emissions trading scheme argue that it actually harms competitiveness and that it is ineffective because carbon prices have been much lower than expected (The Economist). The environmental effects of the policy are limited, as business are overloading on permits for a future date. The “generosity” of the Commission may have been the main impediment to the success of the project (Martin et al.).
The Continued Greek Discussions
Discussions around Greece continue as the economy declines further, according to EuroIntelligence. Greek industrial output fell by 1.9% in October yoy, with deflation (-0.7%) and despite improvement in unemployment.
Negotations revolve around three contentious issues (EuroIntelligence): opening up the energy market, the new privatisation fund, and, especially, the management of bad loans according to Reuters and Kathimerini. The government submitted an initial draft of an ambitious pension reform (EuroIntelligence and Kathimerini), which must be adopted in January prior to the first bailout review.
The Wall Street Journal reports on a technical paper from the ESM, with a blueprint for Greece's debt relief—with options ranging from maturity extension, a link of debt repayments to GDP growth and capping or deferring interest payments to bring Greek debt on a sustainable path (i.e., funding needs below 15% of GDP). The ESM proposal is to fix debt repayments to 1% of GDP for 2023-2033 and 1.5% from 2034-2044, with repayment on outstanding debt starting in 2044.
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Extremism and elections in Europe: It’s the economy, stupid
A key factor behind the success of extremism is economics: the failure in recent decades to generate real income gains for workers and the financial collapse of 2007-2008 (The Economist). Not just “bad times,” but how traditional sources of authority have devalued themselves through repeated policy failure, as noted by Paul Krugman and Kevin O’Rourke. Jeremie Cohen-Setton, in a Bruegel blogspot, reviews the litterature behind this. Funke, Schularick, and Trebesch actually find precedents in the rise of right-wing extremism following financial crises, or when crises are allowed to persist (Alan de Bromhead, Barry Eichengreen, and Kevin O’Rourke and Francesco Trebbi, Atif Mian, Amir Sufi). This calls for urgent EU reform (Open Europe).
Other factors are important, such as immigration, refugees, and terrorism, but economic underperformance is a magnifying factor according to Paul Krugman.
