As the number of covid-19 cases plateaus and the magnitude of the medical challenge becomes easier to estimate, policymakers and economists are looking to stabilise and re-ignite stalling economies. It has become clear that the economic hangover from the pandemic may indeed be longer lived than the disease itself. Consider all the ways the lockdown has changed people’s habits as they found an alternative way of living.

For example, business travel is likely to be significantly reduced, and companies and employees could recalibrate the amount of time spent in the office versus time spent at home. This could affect all the business sectors supporting travel and commuting, as well as the balance between commercial and residential real estate. This pandemic has also further accelerated the adoption of online shopping and entertainment over their non-virtual alternatives, which will be a challenge for retail and physical entertainment. People have even discovered how to live without professional sporting events, which could change their relationship to their favourite teams in the future.

In any case, there will be industries that are existentially challenged by the crisis – and the resulting behavioural changes – and there will be industries that benefit. Beyond that, policymakers have a unique chance to change the priorities of economies coming out of the crisis to focus on areas that they wanted to devote more attention to, but did not because of strong economic momentum.

The coronavirus crisis has implications for climate change

In Europe (and potentially in other regions), climate change and the associated energy transition got a lot of media and political attention in 2019. Yet tangible, clear changes that might lead to a carbon-neutral world by 2050 were still a bit hard to discern. The advent of the coronavirus crisis has dramatically shown how a less energy-intensive world could look, and it could also make European countries more open to bold innovations that could help get people back to work.

One such move could be a pan-European carbon-pricing system, which has been made more viable by the steep drop in energy prices – particularly oil. Low prices present a unique opportunity to implement such a system without significant initial marginal costs to industry compared with the pre-coronavirus period. We believe there are intelligent solutions to be found that maintain the European Union’s global competitiveness through border-adjustment pricing and trade regulations.

Moreover, if this carbon price were implemented at the EU level, it would provide significant funds for a common European budget. I like the idea from Robert Litterman of Climate Central to use the proceeds to fund a “poll credit” in the form of a per-capita distribution to all EU residents. Perhaps a smaller share of the revenue could also be used to support additional energy-transition investments. Using the proceeds in this way could help make up for otherwise slowing economic activity.

A carbon-price system could be good for the EU

Ideally, a carbon-price system would apply globally, but since any global approach is unrealistic for the time being, starting inside the EU would be a good first step. Using a common carbon price for a common good would give European countries a good reason for doing something on an EU-wide basis. Since the negative externalities of global warming are suffered by all – not just by carbon-producing countries – a pan-European carbon price with associated pan-European distribution of revenue would be appropriate. Under such a system, the biggest polluters would contribute more, and everyone would benefit equally from the funds as compensation for widespread environmental deterioration. Fiscal transfers for general government expenditures are difficult to agree on, but it’s more politically palatable to implement a levy on the use of a common good (global carbon capacity) and then redistribute it to all.

A carbon-pricing system could help the energy transition - and individual citizens

Just to put some rough numbers around the proposal, the 27 countries of the EU have a combined population of about 445 million people. According to Eurostat, the CO2 consumption of the EU-27 is close to 4 billion tonnes per year – roughly 9 tonnes per capita. With a CO2 price of EUR 100 per tonne (which works out to about EUR 45 per barrel of oil), the carbon-pricing system would provide the EU with revenues of about EUR 400 billion.

If EUR 90 billion of this was spent on the energy transition and the rest was distributed to EU residents on a per capita basis, each EU resident (including children and retirees) could expect about EUR 700 per year in direct EU subsidies. This would have several positive effects – including creating a tangible benefit of EU membership, and providing massive direct stimulus when the economy is struggling.

With the oil price now under EUR 30 per barrel, the extra EUR 45 per barrel carbon price would leave us at about EUR 75 per barrel. This is within the price range that industry has been accustomed to in recent years, so it wouldn’t really be a specific brake on economic activity. Furthermore, the EUR 90 billion investment in energy transition and infrastructure would go a long way toward meeting the EU’s investment goals. In addition, if everyone in the EU started getting a direct cheque from the European Commission for EUR 700 per year, the overall popularity of the EU would improve.

The EUR 90 billion should be invested in energy technology to support the transition to carbon-neutral sources. Here the EU can subsidise investments in smart home technologies, smart grids, better transmission infrastructure, carbon-capture systems and battery/storage technologies. As the coronavirus has re-emphasised the need to look after our living environment, the need to limit climate change is more compelling than ever. The EU has a chance to become the world leader in driving the changes necessary to limit greenhouse gases. Restarting economies will be an important objective for policymakers in the second half of 2020. This is an ideal opportunity for them to use their enormous policy levers to direct economic activity in a way that both improves the world and allows for new growth vectors that put the EU ahead of the curve, not behind it.

A carbon price could help the EU innovate and grow in a sustainable way

To ensure that there would be no CO2 leakage into the EU through imports, the EU would also need to implement a CO2 border-adjustment charge for the CO2 produced in the manufacturing of goods in their home countries. Similarly, exported goods would get a CO2 credit when exported outside the EU to ensure that they remain cost competitive outside the union. This would encourage energy efficiency not only at home, but also with trading partners, as imports with high carbon footprints would have difficulty competing with products made in a more benign way. Eventually it would also provide a blueprint for other economies that would like to focus on environmental responsibility and create a standard for how to approach global warming. The EU should see the current crisis as an opportunity to recalibrate its economy and industrial policy to become a global innovator and rediscover how to catalyse economic growth in an environmentally responsible way.

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