Carbon pricing: can Europe succeed where Macron failed?

And yet, European Commission president Ursula von der Leyen has been beating the carbon pricing drum ever since she took office. At this very moment, her Commission is working on a European carbon levy on drivers as part of its big climate plan due in June. This is likely to please the orthodox economists and the powerful German auto lobby. For car industry executives like Volkswagen’s Herbert Diess, taxes on drivers are a great alternative to regulations forcing his company to sell cleaner cars. 

The EU executive is thinking about a carbon market where the cost of diesel and petrol would increase as much as needed to achieve Europe’s climate goals. But since people only change their behaviour after big fuel price increases, a “whatever carbon price it takes” scheme could easily lead to carbon prices of €250/tonne or more – pushing fuel prices up by 40-50%. This may work beautifully in theory but in practice it is more likely to cause a revolt.

For us the top priority right now is to require auto companies to sell affordable, high quality electric cars. People need a real and accessible alternative to polluting cars. This is about fairness but also about effectiveness. We won’t go green by taxing drivers in the hope that they’ll make a shift to cars that auto companies don’t actually want to sell. That doesn’t mean there is no place at all for carbon pricing but if we want to avoid political disaster, we need to heed the lessons learned in France.

A three point plan to avoid disaster

First, the key to acceptance lies is generous and visible compensation. How will people benefit from what can be a rather regressive form of taxation? The Commission currently wants to use the money to pay back its Covid stimulus debts. That’s not exactly a compelling story for the teachers, nurses and working people across Europe that are being asked to pay higher heating and fuel costs. Instead the EU executive should be thinking about paying Europeans a lump sum climate dividend or ways to use the money to invest in public services like hospitals and schools. 

Second, people need alternatives to polluting cars. In cities, bikes and public transport can and should be that alternative. But we need alternatives for everyone. Europe has the tools to make clean electric cars accessible to all. Despite all the tricks the car industry used, the EU car CO₂ law, led to a trebling of electric car sales in 2020. Here’s a policy that actually works! Ms von der Leyen should stop giving the German car lobby an easy ride and phase out diesel and petrol cars in the next 10-15 years, just like the UK and California. 

Then, and only then should it be thinking about higher fuel bills. Initially the carbon tax will need to be low, for example, similar to those in the recently agreed German emission trading scheme. As electric cars become more accessible and as oil demand and oil prices start to drop the carbon tax can start to increase gradually. Over time the main purpose of the carbon tax will evolve into guaranteeing that fuel prices at the pump don’t go below a certain level.

Last but not least, people get really angry about high fuel prices, not taxes. The gilets jaunes revolt coincided with the biggest oil price spike in years. So the last thing you want is a carbon price kicking in just when oil prices are peaking. That will almost certainly kill the system. So we should only increase fuel and carbon taxes when oil prices are falling. Belgium used exactly this approach to level its historical low diesel taxes with petrol in just a few years’ time, without anyone seeming to notice.

The EU executive’s plan ignores these lessons at its peril. Never mind the auto lobby and orthodox economists. The Green Deal and the future of the EU are at stake. Macron made a U-turn but survived; unless the Commission changes track, it may be setting itself up for something a lot worse.