Policy Documentation Center

Gros, Daniel

Egenhofer, Christian

  
Daniel Gros is Director of the Centre for European Policy Studies (CEPS) in Brussels. Christian 
Egenhofer is Senior Fellow at the Centre for European Policy Studies (CEPS), where he heads the 
Climate Change and Energy Unit. 
CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. 
The views expressed are attributable only to the authors in a personal capacity and not to any 
institution with which they are associated. 
Available for free downloading from the CEPS website (http://www.ceps.eu) ? © CEPS 2010 
Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ Fax: (32.2) 219.41.51 ▪ http://www.ceps.eu 
Decision Time for Europe on Climate Change 
Keep the head buried in the sand or get tough? 
Daniel Gros and Christian Egenhofer 
6 October 2010 
lobal climate change negotiations continue, with one meeting following another at regular 
intervals. But in reality, the news has not been good and things are getting worse. Recent 
meetings were very much a step back from those leading up to the December COP-15 in 
Copenhagen. Rather than building on the Copenhagen Accord, negotiators seem to prefer to re-
generate long texts containing an increasing number of options. At best, this can be interpreted as a 
standstill. Meanwhile, across the Atlantic, efforts to present federal climate change legislation to the 
US Senate have been abandoned as supporters realised that the bill stood no chance of passage – 
despite the high priority President Obama has attached to climate change.  
Without the American climate change bill, the promises made by the US administration in 
Copenhagen are likely to fall short of making a meaningful contribution to the global effort of 
reducing GHG emissions, jeopardising the much-hailed new architecture of the Copenhagen Accord 
after less than one year. The European strategy is also in tatters. The EU stubbornly sticks to its 20% 
reduction commitment (by 2020, compared to 1990), knowing that this would be insufficient on its 
own, under any circumstance, for reaching its self-declared objective, namely to keep the global 
temperature increase to 2°C. The commitment by the Chinese government – to increase the CO2 
efficiency of its economy by about 3% per annum – is of no help either, despite the spin put on it in 
the media. Chinese economic growth rates of close to 10% translate into a doubling of Chinese 
emissions over the present decade, even if the Chinese target is fully met. By 2020, Chinese emissions 
could thus well be more than three times as large as those of Europe and surpass those of the US and 
Europe combined! Exempting emerging markets from any commitments, as was done under the Kyoto 
Protocol, no longer makes any sense. This is increasingly the view taken by Japan, Russia and even 
the EU. But why would China, India and other emerging economies accept stringent commitments if 
the US, historically the biggest emitter and still on a par with China, is unwilling to accept even a 
modest reduction? 
Any solution will need to address the core of the problem: ‘coal’, or, more accurately, abundant coal. 
Burning hydrocarbons (natural gas and petrol) yields both water and CO2. By contrast, burning coal 
yields only CO2. On average coal emits more than 100% more GHG than natural gas with which it 
competes in power generation. Moreover, coal is widely available and is much cheaper per tonne of 
CO2 released than either natural gas or crude oil. Here it becomes clear that any tax on carbon falls 
much more heavily on coal than on crude oil (or gas).  
G 
2 | Gros & Egenhofer 
Some have dubbed coal the ‘most democratic’ fuel because in general, it is produced where it is used. 
Only somewhat more than 10% of the world’s consumed coal is traded across borders, a figure that is 
projected to remain stable. In contrast, the figure for oil is close to 50% and is fast-growing. Coal 
production in major regions such as North America or Asia matches consumption; only Europe is a 
significant importer (see Figure 1). As a result coal does not cause anxieties of import dependency. 
And coal will remain available for a long time. While proven oil reserves are in the order of a bit more 
than 40 years (at current consumption levels) and gas for 65 years, proven coal reserves extend to 
almost 120 years.  
 
 
 
This may explain why coal has been the highest-growing fossil fuel consumed in the world in the last 
decade. The share of coal in total energy in the Asian economies is about 50%. China alone produces 
and consumes half of the global coal supply. Some 70% of its energy needs are covered by coal, 
which accounts for close to 90% of its CO2 emissions. The corresponding figures for the EU are much 
lower (see Tables 1 and 2). The owners of coal mines and their clients worldwide, i.e. power 
companies and industry, are strongly opposed to any tax on carbon. They constitute a small, but 
extremely well-organised group, especially when it teams up with other fossil fuel lobbies, which 
wield immense influence to block policies aimed at limiting emissions of CO2 and putting a price on 
carbon. In the US, coal states ‘neatly’ coincide with battleground states where elections are lost or 
won.  
 
Table 1. What are the major home-produced sources of CO2 emissions? 
By fossil fuel, in CO2 units (millions of tonnes) 
  Oil Gas Coal 
US  959 1,191 2,318 
World  12,025 6,332 12,379 
EU  349 412 704 
OECD  2,768 2,367 4,080 
FSU  1,923 1,697 937 
China  575 149 5,091 
India  115 65 714 
 
 
Source: BP Statistical Review of World Energy, 2010. 
Figure 1. Global coal production and consumption 
Decision time for Europe on climate change | 3 
Table 2. Where are the coal lobbies? 
Production of fossil fuels (mtoe) 
  Oil Gas Coal 
US  311 499 587 
World  3,906 2,654 3,136 
EU  113 173 178 
OECD  899 992 1,033 
FSU  625 711 237 
China  187 62 1,290 
India  37 27 181 
 
In Europe, however, indigenous coal production no longer plays an important role, except perhaps for 
Poland. It is thus not surprising that it was possible to enact a ‘cap and trade’ system here, which 
imposes a carbon price at least on a large part of European industry: the tax seems to fall mostly on 
foreign suppliers of coal (and to a lesser extent on foreign suppliers of hydrocarbons in the Middle 
East and Russia). By contrast, in the US domestic coal production (and consumption and hence the 
coal lobby) is much more important, with production almost four times as large as in the EU (see 
Table 2).  
The writing is clearly on the wall for those who championed carbon taxes as the means of achieving 
emissions reductions in the US. The fact that a climate bill will not even be presented to the US Senate 
also has wider implications: if it proved impossible to obtain a decision to introduce a moderate 
carbon tax in a rich economy with only a moderate dependency on coal, it is certain that no 
commitment will be forthcoming for the next generation from China, which is still much poorer and 
depends even more on indigenous coal than the US (and produces twice as much as the US). And after 
China, India looms as the next emerging coal-based industrial superpower. 
Without any significant commitment from the US, the Copenhagen Accord, so laboriously achieved 
last year, will soon become obsolete. So, business continues as usual, both in terms of climate change 
diplomacy with its wandering circus of big international meetings, and in terms of rapidly increasing 
emissions. The former is designed to create the impression that the world’s leaders are still working on 
a solution to the problem. But the latter, more alarmingly, constitutes what is really happening on the 
ground: a rapidly growing industrial base in emerging markets that is hard wired to an intensive use of 
coal, thus making it more and more difficult to invert the trend at some point in the future. Europe and 
other industrialised countries continue to ‘outsource’ GHG emissions at scale. Recent research 
suggests that Europe imports the equivalent of 4 tonnes of CO2 per person in the form of products 
containing embedded carbon. The equivalent figure for the US is 2.5 tonnes per person.1  
Could anything be done to prevent the world from rapidly using up its carbon budget? The obvious 
answer seems to be to deploy massive-scale carbon capture and storage (CCS) technology, which is 
able to sequester the carbon and store it. However, while everybody talks about this technology, it is 
still in the demonstration phase. In order to become a serious abatement solution by 2020, according to 
the IEA’s 2009 ‘Blue Map’ scenario, 100 carbon capture plants, a minimum of 10,000 km of pipelines 
and storage of 1.2 GtCO2 would have to be put in place. There is little indication that this will happen 
anywhere close to 2020. Progress is hampered by public opposition, siting problems and the lack of 
finance and a regulatory framework. Given the sheer scale of investment required, one cannot 
realistically count on CCS for meaningful reductions before 2030, but more realistically in 2035-40. 
And by that time, the official goal of limiting temperature increases to 2°C will definitively no longer 
be achievable. 
The other – more promising – route would be for the EU to go it alone and impose an import tax on 
the CO2 content (i.e. including the embedded carbon) of all goods imported into the EU from countries 
that do not have their own cap-and-trade system or equivalent measures. This is an appropriate task for 
                                                     
1 See e.g. Steven J. Davis and Ken Caldeira, Consumption-based accounting of CO2 emissions, Proceedings of 
the National Academy of Sciences (PNAS), 1 March 2010 (http://www.pnas.org/content/107/12/5687). 
4 | Gros & Egenhofer 
the EU as one of the world’s major economies and still the biggest importer. Such a carbon import 
tariff improves global welfare because it transfers, at least partially, via trade flows, carbon pricing 
even to those parts of the world where governments have so far refrained from imposing domestic 
measures of any magnitude. In other words, it creates a mechanism that enforces the pass-through of 
carbon costs across the globe. That will erode the huge differentials of embedded carbon in exports 
between different countries. As shown in Table 3, exports of China and India are around five times 
more carbon-intensive than the GDP of the EU, a situation that can hardly be squared with reducing 
carbon globally at a massive scale.  
Table 3: Carbon intensity of exports and GDP in selected key economies 
  CO2 intensity of exports CO2 intensity GDP 2005 
EU27  0.47 0.43 
US 0.72 0.53 
China  2.46 2.43 
India  2.67 1.78 
Brazil  1.05 0.5 
Russia  3.85 4.4 
Sources: Own calculations based on IMF data and Weber, Christopher L., Glen Peters, Dabo Guan and Klaus Hubacek 
(2008), “The contribution of Chinese exports to climate change”, Energy Policy, Vol. 36, No. 9, pp. 3572-3577. The carbon 
intensity of exports is based on 2002 data. Both intensities are measured as tonnes of carbon per $1,000 of exports. (cited in 
Daniel Gros and Christian Egenhofer, Climate Change and Trade: Taxing carbon at the border?, CEPS Paperback, p. 36). 
A key effect of such a tariff is that it would reduce global emissions under all circumstances and 
therefore serve as an important tool for fighting climate change.2 Granted, if imposed by the EU alone, 
the effect might be limited, but it would at least serve as a clear signal to producers keen to sell 
everywhere in the world, including China, whose most important market is still the EU. From a purely 
economic perspective, an EU carbon import tariff would be a straightforward means of moving 
towards a global ‘shadow’ carbon price, even in the rest of the world, and thereby towards an efficient 
climate change policy. Solutions can be devised to concerns such as WTO compatibility and equity, 
the latter for example through rebating to less developed countries such as India3 in line with 
‘responsibility’ for actual and historical emissions and ‘capability’ to reduce emissions, two 
fundamental principles under the UN Framework Convention on Climate Change. Analytical tools to 
establish both responsibility and capability exist, such as the widely known GHG Development Rights 
(GDR) concept or the Global Carbon Budget approach, similar to the GDR and developed by a group 
of Chinese scholars.   
The imposition of import taxes on CO2 content is still highly controversial within and between the EU 
member states, with different industries taking different stances. This lack of a clear line is also 
evident within the European Commission. True, carbon tariffs at the border are not a solution that rich 
and poor countries alike fancy. Unfortunately, however, there is enough cheap coal around to power 
ever-increasing emissions for at least another century. A planet composed of nation states that in turn 
are dominated in part by special interest groups does not seem capable of solving this problem – either 
from inside or outside the UN. The EU so far appears to be the only major actor among industrialised 
countries that might be able to break this stalemate by getting tough. Oddly enough, there is a 
discussion in India – and in a somewhat different context in China – of imposing export taxes on high-
carbon exports to steer the economy towards lower carbon intake and avoid being locked into a high-
carbon capital stock. A substantial export tax on high carbon exports by China and India would of 
course achieve the same effect as an EU import tax in terms of introducing a price for carbon in 
international trade and it would have the additional advantage of assuring governments that the taxes 
would end up in their coffers.  
 
                                                     
2 See also the Comment by Dieter Helm in the Financial Times, “A carbon border tax can curb climate change”, 
5 September 2010. 
3 For an up-to-date analysis and overview, see Daniel Gros and Christian Egenhofer, Climate Change and Trade: 
Taxing carbon at the border?, CEPS Paperback, Centre for European Policy Studies, Brussels, 2010. 


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