Logo CE Delft

Press release - Paris climate accord requires an economic turn-around, investment of 2% GDP annually needed

23/06/2016 -

The targets agreed to at the Paris climate summit in late 2015 imply a radical change to our economies, a new report by CE Delft shows. As most of the products and machines we use today do not meet the demands of a low-carbon economy, an enormous investment drive will be needed that in its scale and impact can best be compared with the transformation that occurred in the East European countries post-1989.

Investment of 2% GDP annually needed
The envisaged 80-95% reduction in carbon emissions by 2050 has been recently explored by CE Delft in the study ‘Investment challenges of a transition to a low-carbon economy in Europe What sets the pace?’ The different CO2 scenarios showed that this will require annual investments of up to 2% of the EU-GDP. This implies that investments must accelerate by a factor 5 compared to present efforts for every year up to 2050. The CE Delft report identifies four key areas through which this money could be made available:

Increasingly higher carbon price
To attract investors’ interest in this enormous transition requires an initial carbon price of 40 euro per tonne (current price: €6) and a further increase to around 100 euro in 2030, rising subsequently to 250 euro in 2050. This kind of hefty price tag on carbon emissions will lead to enormous shifts in demand for individual products and services, driving accelerated write-down of current investments (in fossil-based infrastructure, vehicle fleets, buildings, machines and production plant, among other things). At the same time it will mean profitability for investments in still expensive technologies like renewable energy and carbon capture and storage (CCS).

Carbon tax on products
For certain segments of the energy-intensive industry, the required investments will create too great a cost handicap in the global market. To maintain fair competition in the European marketplace, a carbon tax would have to be levied on products from outside the European Union that evens out the competitiveness of companies operating inside and outside the EU-ETS. This can be achieved by means of a ‘carbon-added tax’ (CAT) that, analogously to VAT, taxes the carbon added in each production stage, regardless of the country of origin. In this way a more level playing field can be created.

Substantial divestment essential
The required investments will only materialize if current investments in fossil industries lose their profitability and divestment takes place. In the East European countries, divestments were spurred by a radical collapse of local currencies that rendered existing assets virtually worthless. The transformation to a low-carbon economy will have to introduce a comparable price mechanism in order to achieve accelerated write-down of current investments. The best means of devaluation is a rapidly rising carbon price paid in every corner of society, a price included and felt in every single product and service. In addition, it may be necessary to draw up a restructuring plan for areas now rely very much on employment in the fossil industry.

Green growth
The gigantic investments necessitated by the transition to a low-carbon economy are not just costs for society but will also generate economic growth. Instead of spending billion of Euros on fossil fuel energy imports, investments imply that the local economy will be better stimulated. The proposed carbon added tax on products irrespective their origin of production will improve Europe’s competitive edge in the green economy of the future. ---------------------------------------------------------------------------------------------------------------------
The study was commissioned by the European Climate Foundation (ECF). For more information Han Schouten, press officer, CE Delft, schouten@ce.nl, tel. 0031 (0) 15 2150 150.

Other articles