Putting carbon pricing at the centre of the EU climate policy architecture would provide major benefits. Obtaining these benefits requires a uniform, credible and durable carbon price – the economic first-best solution, however, several preconditions required to attain this solution are not yet met.
The European Union’s plan for climate neutrality by 2050 reopens the question of the role carbon pricing can and should play. Carbon pricing should not – and ultimately cannot – only be an enforcement tool or backstop that ensures targets are met, while the heavy-lifting of decarbonisation comes from directed technological change policies. Instead, a technology-neutral carbon price must become the main element, providing signals for decarbonised operations, investment and innovation in all sectors.
The paper A whole-economy carbon price for Europe and how to get there published by European think tank Bruegel proposes a sequenced approach to ensure convergence of the policy mix on the first-best in the long run.
Read the full paper here.