Monika Patriarchea // 2 June 2021

Most countries are not on track to meet their promises made under the Paris Agreement, as impactful climate action is often hindered by the high costs of decarbonisation. Contrary to other countries or blocs, the EU is improving its performance on the Climate Change Index and also meeting its climate change targets. From healthy soils to forest preservation policies, the EU is constantly updating its Green Deal and adding more climate measures to its bucket list. The EU has also paved the way for the creation of the first and largest carbon market with the EU Emissions Trading Scheme (EU ETS) where polluters pay for every tonne of CO2 emitted.

At first glance, this strong EU interventionism seems to contradict free market principles, as it does not fit into the conventional, non-interventionist economic environment typically advocated by free market proponents. However, by simply putting a price on externalities, these regulations allow the market to properly function without micro-regulating various sectors. This steers market participants away from carbon-intensive technologies and towards research and innovation of alternative means of production.

Carbon neutrality can be pursued through two paths which are conceptually very different. On the one hand, policy makers can incentivise market players to achieve net-zero emissions without mandating the means to do so. A cap-and-trade system, or the carbon tax would be such an example. On the other hand, regulators can push the market towards certain technologies and innovations. However, such overly prescriptive interventionist measures run the risk of paralysing the market and not achieving the most optimal results.

The German government’s recent policy  seems to be an example of the latter. It wishes to steer consumers away from carbon-intensive technologies, by actively promoting the use of electric cars through reducing VAT and promoting subsidies in the automotive sector. At first glance, this seems like a reasonable policy towards decarbonisation, as research suggests that electric cars have a lower carbon footprint than cars running on fossil fuels. However, the real impact of electric car batteries is currently up for debate due to the environmental risks associated with mining the minerals needed in their creation.

A UNCTAD report has shown that the large amount of water needed for the extraction of lithium, which is necessary for the production of batteries, leads to soil contamination and groundwater depletion, especially in developing or emerging countries where most of the extraction takes place. In fact, many European manufacturers of electric cars like Renault, Mercedes and Volkswagen import their lithium supply, from China, or produce it directly there in their own facilities, avoiding the burden of environmental degradation within their own countries.

While electric cars reduce the German carbon footprint, or respectively other European countries’ footprints, they also demonstrate the environmental injustice of treating climate change as a national rather than a global issue.

The EU, warry of this problem, is currently discussing a Carbon Border Adjustment Mechanism, or Carbon Border Tax. This aims to accelerate the achievement of net-zero emissions by 2050 and avoid “carbon leakage”, which occurs when firms relocate to countries with more lax environmental regulations. Such tax will have a direct impact on the means of production in terms of goods imported and traded within the EU – especially on the high emitters.

Just like a levy on carbon emissions in the internal market, a carbon border tax can incentivise the market to research and innovate to find the best alternatives to fossil fuels. What is clear is that pushing the market in a certain technological direction can have adverse economic and environmental side-effects. This underlines that decarbonisation above all should go hand in hand with technological freedom.