Experts: Climate policy must be tailored to each individual country

The discussion about CO₂ pricing is a hot topic in the public debate. But relatively few experts have their say, so it can be difficult to know whether there is consensus among professionals about the different types of climate policies.

Associate Professor of Economics Frikk Nesje from the University of Copenhagen, together with two colleagues from Germany and Switzerland, has therefore asked a large number of international experts in climate policy how a good policy should be structured. This includes, for example, the choice between CO₂ taxation and CO₂ quota trading, the question of border carbon adjustment on internationally traded goods, and how to use the revenue generated by climate policy.

Their study shows that there is no one universal solution: the recommendations from the more than 400 experts who participated in the study vary considerably depending on geographical location, including their country's level of economic development, and professional background.

"Our goal has been to provide decision-makers with a solid knowledge base so that they can tailor climate policies that combine environmental effectiveness with economic efficiency and fairness, regardless of where in the world they are to be implemented. This is to ensure that climate policy both works and is adopted," explains Frikk Nesje.

The study presents the largest international survey of recommendations on the topic to date.

Overwhelming majority in favour of border carbon adjustment

The study shows that twice as many experts prefer a CO₂ tax to trading in CO₂ quotas, as in the European Union Emissions Trading Scheme (EU ETS). However, the figures mask significant geographical and economic differences:

"In high-income countries such as the United States and Denmark, there is a clear preference for taxes. In low-income countries, the picture is more mixed – here, quota trading is often recommended, which is probably because experts from low-income countries believe that it will be significantly easier and more effective to introduce quotas than taxes. This may also be due to the possibility of transferring quota-based revenues between countries," says Frikk Nesje.

On the other hand, as many as 74 per cent of experts – regardless of where they come from and what their professional background is – believe that it is necessary to introduce some form of border carbon adjustment by imposing a tax on imported goods that corresponds to the importing country's CO₂ tax, as well as compensation for CO₂-intensive exports.

"Border carbon adjustment has clearly become a key element in the discussion on how to avoid distortion of competitiveness and CO₂ leakage in connection with climate policy. And it is remarkable how broad the support is, considering the legal and technical challenges associated with introducing border carbon adjustment," says Frikk Nesje.

Border carbon adjustment will also play a central role in the EU's climate policy through the Carbon Border Adjustment Mechanism (CBAM).

What should the money be used for?

When it comes to the use of revenue from CO₂ taxes or CO₂ quotas, experts are more divided. The most popular option is investment in green research and development, closely followed by targeted transfers to the households hardest hit by the climate policy.

Experts are far less supportive of paying the revenue as fixed amounts directly to households, as is often proposed in research and political debates in the United States.

"Here we can see that the experts' professional backgrounds play a particularly important role: economists typically recommend measures aimed at economic efficiency, such as reducing distortionary taxes or transfers of money to households. Conversely, experts from other professional groups are much more likely to suggest that the money should be spent on public investments in, for example, green technology," says Frikk Nesje, concluding:

"This difference also reflects a classic divide between economic theory and political realism. Both perspectives are important if you want to design policies that both work and get passed."