What does the economic outlook mean for the EU’s climate change plans?

Climate change was the hot topic at last year’s World Economic Forum. This time round, it is sub-prime loans and the debt markets; SocGen and the equity markets; and the economic fundamentals that might be behind these volatilities.

On the first day of the conference, the chair of the IPCC said that he is concerned world leaders might be distracted by such short-term issues. Well, they are a little distracted. Pretty much everyone thinks that growth will be weak in the developed world in 2008. That has not stopped European politicians from supporting the EC’s package of climate change and energy proposals, which was released earlier this week.

Two ways that the economic outlook could affect European plans to manage greenhouse gas emissions are:

  1. The idea of carbon tariffs for imports into the EU will gain currency as employment moves up the political agenda. Carbon tariffs would mean that importers of goods from countries with low emissions costs would have to purchase EUAs, preventing them gaining an advantage in the European market over European producers.
  2. Tighter credit will mean that the price of emissions allowances will have to rise to make the reductions envisaged by the EC’s plan look financially sensible. All reductions require some level of investment, and as the cost of capital rises, demand for allowances will increase. For industries outside the EU ETS, governments will have to make stricter regulation to force these costs onto consumers, or provide more fiscal incentives.
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