Playing Their Part (In a Morality Play)

Eakinomics: Playing Their Part (In a Morality Play) The European Union is channeling its inner Jimmy Carter (or, as the French would say, “Jimmy Carter”). As reported by The Hill: “The European Union is encouraging its citizens to work from home, use public transportation and turn off heaters in an effort reduce the bloc’s reliance on Russian fuel. If EU residents adopt a prescribed list of energy-saving steps, they can together ‘save enough oil to fill 120 super tankers and enough natural gas to heat almost 20 million homes,’ according to an outline published by the European Commission and the International Energy Agency (IEA) on Thursday.” Further raising the rhetoric, but detached from historical reality, IEA Executive Director Fatih Birol said at a virtual summit that “[w]e are, in my view, in the first global energy crisis. It looks like that this crisis may be with us for some time to come.” This makes no sense, no matter what continent you live on. Now, it might make sense as an emergency strategy to ease the near-term impact of a full embargo of Russian oil and gas, at least until other supply lines could be developed. But Europe is most emphatically not doing that. Instead of appeals to some collective morality, the EU should have an economy-wide incentive to move away from oil, gas, and other carbon-based fuels. That incentive would be set at a level that gives the right incentives to reduce the use of carbon fuels over the long term. In response, those who can easily shift their mix of fuels will do so, reducing oil and gas consumption at the lowest cost. Those who can innovate to become more energy efficient will do so, reducing consumption at the lowest cost. In general, it will be the most economically efficient way to meet a long-run goal of moving to a clean energy platform. And, in the near term, if there is a desire to have even greater reductions to punish Russia, just strengthen the incentive. That’s what the Europeans need. But here’s the really mysterious part: They already have one! The European Union Emissions Trading System (EU ETS) “is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It is the world's first major carbon market and remains the biggest one.” The EU ETS is a cap-and-trade system, one of the two economically rational approaches to reducing carbon emissions (the other being a carbon tax). It is, in principle, exactly the right way to both deal with the long run and is flexible enough to be modified for near-term considerations. This sure feels like a case of all talk, no action.