It is unusual for trilogue agreements to be subsequently amended. However, without an additional recital that gives e-fuels a better perspective for use in trucks, the FDP would probably have blocked the revision of the carbon fleet limits for heavy-duty vehicles in the Council.
Today, the responsible environment committee in the EU Parliament will vote on the revision of the truck fleet targets. The committee members will be presented with the version that the EU ambassadors adopted on Friday – i.e., with the recital on e-fuels, which was not actually part of the trilogue agreement.
Opponents of e-fuels in road traffic may not like the fact that the Council did not adhere to the trilogue agreement under pressure from the FDP. But the alternative would be even worse for them: no more revised fleet limits in this legislature. So the Greens will agree grudgingly. Although the EPP supports e-fuels in road traffic, it does not consider the text to be sufficiently open to technology and wants to reject it. The vote is, therefore, likely to be exciting.
There has been great relief among political leaders since the European Parliament and EU Council agreed on a reform of the debt rules on Saturday night. However, economists are critical of the result that was achieved after tough negotiations.
Most economists agree that the new debt rules are an improvement to the current ones in the Stability and Growth Pact. And “by a lot,” as Andreas Eisl, a researcher at the Jacques Delors Institute in Paris, says. Because: “It makes sense to differentiate more between countries.”
The new rules are based on a debt sustainability analysis, intended to define the budgetary leeway for each country individually. With the less draconian penalties, this increases the chances that the rules will actually be applied as they are on paper, according to Eisl.
Cinzia Alcidi, head of the economic policy department at the Centre for European Policy Studies (CEPS), is also positive about the individualization of the rules. The new rules “create an environment in which national governments have more individual responsibility,” Alcidi told Table Media.
The reform originally aimed to reduce the complexity of the rules. However, this goal had to be sacrificed in order to reach a political compromise between the finance ministers. The safety lines demanded by Germany, among others, and the exceptions demanded by the French government, among others, in order to accept these safety lines make the new rules a confusing monstrosity.
“The safety lines were certainly necessary to reach a political agreement, but they increase complexity,” said Alcidi. She also regrets that the structural deficit is now once again a relevant factor in the debt rules.
The inclusion of the structural deficit in one of the safety lines of the new rules is also criticized by Florian Schuster, a researcher at the financial policy think tank Dezernat Zukunft: it is a non-observable variable that can only be estimated. “The methodology used for this has many problems – one of which is procyclicality. This means that deficits have to be reduced excessively in times of crisis,” says Schuster.
Eisl regrets that the opportunity to combine the debt rules with a discussion on the EU budget was missed. In the EU, there is a large divergence in the budgetary leeway of the individual member states, but at the same time a high need for investment. “In my opinion, the reform of the fiscal rules alone is not enough,” he said, explaining that some member states simply had too little financial leeway even without fiscal rules.
According to Eisl, a discussion about additional funding options at the European level would have been appropriate, but the political will to do so was lacking. A study by the Centre for European Reform (CER), for example, suggested that a higher EU budget could be used to financially reward countries that behave sensibly in terms of fiscal policy.
All of the economists surveyed are concerned about the impact of the new debt rules on investment. “The strict requirements for the annual reduction of debt levels and deficits will lead to considerable spending cuts in highly indebted countries – even where it is economically damaging,” fears Schuster.
Alcidi also warns of a vicious circle of too little investment and weak economic strength, which ultimately leads to a higher debt ratio compared to economic strength.
According to the Commission’s Strategic Foresight Report, the EU needs additional annual investment of over €620 billion to achieve its energy and climate targets. At the same time, the Next Generation EU investment program will expire in 2027.
None of the economists surveyed believe that the EU will be able to make these additional investments under the new debt rules, even if a large proportion of them are private investments. “The reality is that we will not be able to close this investment gap,” warns Eisl. “With the new rules, there is not nearly enough leeway for the high future financing requirements,” explains Schuster.
Mr. Edenhofer, in order to achieve the 1.5-degree target, we would not only have to avoid emissions from industrial sectors but also remove more carbon from the atmosphere than we emit. How can this be achieved?
There are two fundamental principles. The first: Whoever issues must pay. The other: Those who provide carbon sinks must be remunerated for doing so. This applies to farmers who permanently bind carbon at the Horn of Africa through their work in the soil as well as to people who use technical filters to remove carbon from the atmosphere and store it in geological formations.
We are talking about billions.
Yes, because if we want to limit global warming to 1.5 degrees in the long term, we will have to remove five to 15 billion tons of carbon from the atmosphere every year until 2050. At prices of US$100 to US$300 per ton of carbon, this means we would have to spend around half a trillion to almost $4 trillion on this waste removal. That’s a gigantic sum, between 0.3 and three percent of the global gross national product – and about as much as the $2.2 trillion in military spending worldwide in 2022. This would create a gigantic economic sector. But nobody is talking about this type of climate financing at the COPs yet.
Why is this debate not happening?
Because politics is not consistent. If you look at the Nationally Determined Contributions, you can see an improvement. But it’s only on paper for now.
However, if you then look at what the governments are actually doing and compare it with what their ministers promise at the COP, the promises lose credibility. They are literally doing the opposite: At conferences, they talk about phasing out coal and oil, while making plans to expand production at home.
But that would all be stranded costs if politics gets its way.
I think the markets are betting that climate policy will not be implemented effectively because they don’t believe the government’s promises are credible. That is why I do not think that we are heading toward an oil and gas production peak, as the International Energy Agency (IEA) says. The markets have so far shown no willingness to abandon fossil fuels.
You mean the markets are unfazed by a passage that calls on countries to ‘transition away from fossil fuels’?
If governments want the markets to react differently, they must make more credible decisions. Such credibility does not come from constantly setting new targets, such as tripling renewable energies, which has now been agreed upon in Dubai. The commitment to transition away from fossil fuels in the COP’s final document sends an important signal.
However, it is now crucial that this move becomes a reality – for example, by the European Union implementing its Green Deal. If, for instance, prices for oil and gas rise and imports into the EU fall under the second Emissions Trading System, which will be introduced in the EU in 2027 for the building and transport sectors, this would affect the markets. To prevent this reduction from leading to increased consumption in Asia, for example, the USA would also have to join.
How is that supposed to work?
The EU could form a kind of demand cartel with the United States: If the EU’s Green Deal and the US Inflation Reduction Act succeed, the demand for fossil fuels will fall credibly. Other countries could join in with carbon pricing. A look at the European Carbon Border Adjustment Mechanism (CBAM) shows just how effective this can be. Its announcement alone has already had a significant impact. India is considering a national carbon tax, Turkey a national emissions trading system and even Republicans in the USA are considering it. Some countries in the Global South want to discuss it with the EU. We will see market reactions as soon as instruments are credibly implemented.
But why is it so difficult to introduce a carbon price, for example? You’ve argued before that politicians could not come up with anything better: reducing emissions and generating revenue that can then be used to finance social benefits.
There are two ways of looking at the climate problem. You can say that we have known since Nicholas Stern’s 2006 climate report that action is cheaper than inaction. This is true, but the benefits of climate policy will be reaped in the future and elsewhere, while the costs are incurred here and now. And they are borne by very powerful groups. If you want to tax the fossil fuel capital stock, you immediately have the entire fossil fuel sector against you: the car industry or the construction industry, for example. You can only overcome this if you are willing to compensate the potential losers – such as home or car owners. The government should have started immediately with compensation for the Heating Act when it came to the largest component of the national economic capital stock.
Do you also propose such compensation on an international scale?
In my view, this is essential. We need mechanisms that support countries in raising their carbon prices. A developing country cannot have the same carbon price as the EU. There must be funds for this. And climate development aid would have to be linked to the countries introducing a carbon price. Such conditional aid payments are a taboo, I realize that. But some kind of burden-sharing would be necessary and effective.
That would mean that developed countries would pay billions so that developing countries could apply a carbon price that is as high as ours?
We would benefit from this. Why? Firstly, because the others would then also pursue a climate policy. And secondly, we protect our industry from competitive disadvantages. It can be used to eliminate freeloaders. It would be a win-win cooperation.
Steffen Meyer has been head of the Economic, Financial and Climate Policy Department in the Federal Chancellery for about two years now, making him one of Olaf Scholz’s most important advisors. In the face of ever tighter financial constraints, he has been helping to maintain the performance of Europe’s largest economy.
For the financial economist, the budget situation is also a reason why Brussels and Berlin are currently so keen to talk about reducing bureaucracy: “Funds for further financial relief are limited, so we need to relieve companies of bureaucracy in particular and at the same time decisively speed up planning and approval processes.”
However, the industry naturally also expects a response to the tax breaks from the US Inflation Reduction Act. “We need to keep as many and especially the central parts of energy-intensive industrial value creation in Europe as possible,” says Meyer. “We must preserve the economic ecosystems that we have in Germany – made up of small and large companies and universities.”
For the 55-year-old, however, it remains to be seen whether the government in Washington will really stick to its billion-dollar program. “Various players in the USA are slowly realizing what an expensive path they have taken with the Inflation Reduction Act. Pricing carbon emissions would of course be a possible, very efficient option.” Overall, there is some uncertainty as to whether the IRA will remain unchanged in the coming years, particularly given the Republicans’ positioning.
However, in the Chancellery they leave no doubt that the tasks of the future cannot be tackled by state financial aid alone. “The targets from climate policy and the Net Zero Industry Act create planning security for companies. But the lion’s share of investments will have to be made privately,” says Meyer.
The economist therefore sees the mobilization of more private capital – including from abroad – as one of the most important European policy challenges after the elections in June. “The Capital Markets Union will be a very important task for the new EU Commission. If you look at the capital available worldwide and how much of it flows into Europe, there is still a lot to do.”
The Chancellor’s economic advisor therefore sees two central tasks for European capital market reform: “Europe has too many different regulations in the tax system and insolvency law. If the EU succeeded in making changes in these areas, it would be a real game changer for the Capital Markets Union and for more investment from investors outside Europe.”
Meyer is thinking less of comprehensive reforms such as a common assessment basis for corporation tax – attempts of this kind have already failed too often in Brussels: “We need harmonized taxation regulations in Europe specifically for the purposes of the capital market.”
Meyer wrote his dissertation on European financial issues at the University of Würzburg. The economist has also been familiar with the USA for a long time – he spent a year studying in Georgia in the early 1990s. The financial scientist later spent eight years at the International Monetary Fund – most recently as Executive Director for Germany.
However, Steffen Meyer spent the longest period of his career at the Federal Ministry of Finance. Until the end of 2021, he headed the sub-division “Fundamental issues of individual economic sectors/welfare state.” He then moved to the Chancellery with State Secretary Jörg Kukies.
At the Spreebogen, Meyer exchanges ideas just as closely with the Chancellor’s summit sherpa as he does with Undine Ruge, Olaf Scholz’s European policy advisor. The exchange with European colleagues was in turn one of Meyer’s most important tasks when he moved to his current position. “You get a feel for where other government headquarters set their priorities,” says Meyer.
He will benefit from this in the coming months when the EU Commission collects issues for the next legislative period – such as the German desire for a closer capital market union. Manuel Berkel
It is unusual for trilogue agreements to be subsequently amended. However, without an additional recital that gives e-fuels a better perspective for use in trucks, the FDP would probably have blocked the revision of the carbon fleet limits for heavy-duty vehicles in the Council.
Today, the responsible environment committee in the EU Parliament will vote on the revision of the truck fleet targets. The committee members will be presented with the version that the EU ambassadors adopted on Friday – i.e., with the recital on e-fuels, which was not actually part of the trilogue agreement.
Opponents of e-fuels in road traffic may not like the fact that the Council did not adhere to the trilogue agreement under pressure from the FDP. But the alternative would be even worse for them: no more revised fleet limits in this legislature. So the Greens will agree grudgingly. Although the EPP supports e-fuels in road traffic, it does not consider the text to be sufficiently open to technology and wants to reject it. The vote is, therefore, likely to be exciting.
There has been great relief among political leaders since the European Parliament and EU Council agreed on a reform of the debt rules on Saturday night. However, economists are critical of the result that was achieved after tough negotiations.
Most economists agree that the new debt rules are an improvement to the current ones in the Stability and Growth Pact. And “by a lot,” as Andreas Eisl, a researcher at the Jacques Delors Institute in Paris, says. Because: “It makes sense to differentiate more between countries.”
The new rules are based on a debt sustainability analysis, intended to define the budgetary leeway for each country individually. With the less draconian penalties, this increases the chances that the rules will actually be applied as they are on paper, according to Eisl.
Cinzia Alcidi, head of the economic policy department at the Centre for European Policy Studies (CEPS), is also positive about the individualization of the rules. The new rules “create an environment in which national governments have more individual responsibility,” Alcidi told Table Media.
The reform originally aimed to reduce the complexity of the rules. However, this goal had to be sacrificed in order to reach a political compromise between the finance ministers. The safety lines demanded by Germany, among others, and the exceptions demanded by the French government, among others, in order to accept these safety lines make the new rules a confusing monstrosity.
“The safety lines were certainly necessary to reach a political agreement, but they increase complexity,” said Alcidi. She also regrets that the structural deficit is now once again a relevant factor in the debt rules.
The inclusion of the structural deficit in one of the safety lines of the new rules is also criticized by Florian Schuster, a researcher at the financial policy think tank Dezernat Zukunft: it is a non-observable variable that can only be estimated. “The methodology used for this has many problems – one of which is procyclicality. This means that deficits have to be reduced excessively in times of crisis,” says Schuster.
Eisl regrets that the opportunity to combine the debt rules with a discussion on the EU budget was missed. In the EU, there is a large divergence in the budgetary leeway of the individual member states, but at the same time a high need for investment. “In my opinion, the reform of the fiscal rules alone is not enough,” he said, explaining that some member states simply had too little financial leeway even without fiscal rules.
According to Eisl, a discussion about additional funding options at the European level would have been appropriate, but the political will to do so was lacking. A study by the Centre for European Reform (CER), for example, suggested that a higher EU budget could be used to financially reward countries that behave sensibly in terms of fiscal policy.
All of the economists surveyed are concerned about the impact of the new debt rules on investment. “The strict requirements for the annual reduction of debt levels and deficits will lead to considerable spending cuts in highly indebted countries – even where it is economically damaging,” fears Schuster.
Alcidi also warns of a vicious circle of too little investment and weak economic strength, which ultimately leads to a higher debt ratio compared to economic strength.
According to the Commission’s Strategic Foresight Report, the EU needs additional annual investment of over €620 billion to achieve its energy and climate targets. At the same time, the Next Generation EU investment program will expire in 2027.
None of the economists surveyed believe that the EU will be able to make these additional investments under the new debt rules, even if a large proportion of them are private investments. “The reality is that we will not be able to close this investment gap,” warns Eisl. “With the new rules, there is not nearly enough leeway for the high future financing requirements,” explains Schuster.
Mr. Edenhofer, in order to achieve the 1.5-degree target, we would not only have to avoid emissions from industrial sectors but also remove more carbon from the atmosphere than we emit. How can this be achieved?
There are two fundamental principles. The first: Whoever issues must pay. The other: Those who provide carbon sinks must be remunerated for doing so. This applies to farmers who permanently bind carbon at the Horn of Africa through their work in the soil as well as to people who use technical filters to remove carbon from the atmosphere and store it in geological formations.
We are talking about billions.
Yes, because if we want to limit global warming to 1.5 degrees in the long term, we will have to remove five to 15 billion tons of carbon from the atmosphere every year until 2050. At prices of US$100 to US$300 per ton of carbon, this means we would have to spend around half a trillion to almost $4 trillion on this waste removal. That’s a gigantic sum, between 0.3 and three percent of the global gross national product – and about as much as the $2.2 trillion in military spending worldwide in 2022. This would create a gigantic economic sector. But nobody is talking about this type of climate financing at the COPs yet.
Why is this debate not happening?
Because politics is not consistent. If you look at the Nationally Determined Contributions, you can see an improvement. But it’s only on paper for now.
However, if you then look at what the governments are actually doing and compare it with what their ministers promise at the COP, the promises lose credibility. They are literally doing the opposite: At conferences, they talk about phasing out coal and oil, while making plans to expand production at home.
But that would all be stranded costs if politics gets its way.
I think the markets are betting that climate policy will not be implemented effectively because they don’t believe the government’s promises are credible. That is why I do not think that we are heading toward an oil and gas production peak, as the International Energy Agency (IEA) says. The markets have so far shown no willingness to abandon fossil fuels.
You mean the markets are unfazed by a passage that calls on countries to ‘transition away from fossil fuels’?
If governments want the markets to react differently, they must make more credible decisions. Such credibility does not come from constantly setting new targets, such as tripling renewable energies, which has now been agreed upon in Dubai. The commitment to transition away from fossil fuels in the COP’s final document sends an important signal.
However, it is now crucial that this move becomes a reality – for example, by the European Union implementing its Green Deal. If, for instance, prices for oil and gas rise and imports into the EU fall under the second Emissions Trading System, which will be introduced in the EU in 2027 for the building and transport sectors, this would affect the markets. To prevent this reduction from leading to increased consumption in Asia, for example, the USA would also have to join.
How is that supposed to work?
The EU could form a kind of demand cartel with the United States: If the EU’s Green Deal and the US Inflation Reduction Act succeed, the demand for fossil fuels will fall credibly. Other countries could join in with carbon pricing. A look at the European Carbon Border Adjustment Mechanism (CBAM) shows just how effective this can be. Its announcement alone has already had a significant impact. India is considering a national carbon tax, Turkey a national emissions trading system and even Republicans in the USA are considering it. Some countries in the Global South want to discuss it with the EU. We will see market reactions as soon as instruments are credibly implemented.
But why is it so difficult to introduce a carbon price, for example? You’ve argued before that politicians could not come up with anything better: reducing emissions and generating revenue that can then be used to finance social benefits.
There are two ways of looking at the climate problem. You can say that we have known since Nicholas Stern’s 2006 climate report that action is cheaper than inaction. This is true, but the benefits of climate policy will be reaped in the future and elsewhere, while the costs are incurred here and now. And they are borne by very powerful groups. If you want to tax the fossil fuel capital stock, you immediately have the entire fossil fuel sector against you: the car industry or the construction industry, for example. You can only overcome this if you are willing to compensate the potential losers – such as home or car owners. The government should have started immediately with compensation for the Heating Act when it came to the largest component of the national economic capital stock.
Do you also propose such compensation on an international scale?
In my view, this is essential. We need mechanisms that support countries in raising their carbon prices. A developing country cannot have the same carbon price as the EU. There must be funds for this. And climate development aid would have to be linked to the countries introducing a carbon price. Such conditional aid payments are a taboo, I realize that. But some kind of burden-sharing would be necessary and effective.
That would mean that developed countries would pay billions so that developing countries could apply a carbon price that is as high as ours?
We would benefit from this. Why? Firstly, because the others would then also pursue a climate policy. And secondly, we protect our industry from competitive disadvantages. It can be used to eliminate freeloaders. It would be a win-win cooperation.
Steffen Meyer has been head of the Economic, Financial and Climate Policy Department in the Federal Chancellery for about two years now, making him one of Olaf Scholz’s most important advisors. In the face of ever tighter financial constraints, he has been helping to maintain the performance of Europe’s largest economy.
For the financial economist, the budget situation is also a reason why Brussels and Berlin are currently so keen to talk about reducing bureaucracy: “Funds for further financial relief are limited, so we need to relieve companies of bureaucracy in particular and at the same time decisively speed up planning and approval processes.”
However, the industry naturally also expects a response to the tax breaks from the US Inflation Reduction Act. “We need to keep as many and especially the central parts of energy-intensive industrial value creation in Europe as possible,” says Meyer. “We must preserve the economic ecosystems that we have in Germany – made up of small and large companies and universities.”
For the 55-year-old, however, it remains to be seen whether the government in Washington will really stick to its billion-dollar program. “Various players in the USA are slowly realizing what an expensive path they have taken with the Inflation Reduction Act. Pricing carbon emissions would of course be a possible, very efficient option.” Overall, there is some uncertainty as to whether the IRA will remain unchanged in the coming years, particularly given the Republicans’ positioning.
However, in the Chancellery they leave no doubt that the tasks of the future cannot be tackled by state financial aid alone. “The targets from climate policy and the Net Zero Industry Act create planning security for companies. But the lion’s share of investments will have to be made privately,” says Meyer.
The economist therefore sees the mobilization of more private capital – including from abroad – as one of the most important European policy challenges after the elections in June. “The Capital Markets Union will be a very important task for the new EU Commission. If you look at the capital available worldwide and how much of it flows into Europe, there is still a lot to do.”
The Chancellor’s economic advisor therefore sees two central tasks for European capital market reform: “Europe has too many different regulations in the tax system and insolvency law. If the EU succeeded in making changes in these areas, it would be a real game changer for the Capital Markets Union and for more investment from investors outside Europe.”
Meyer is thinking less of comprehensive reforms such as a common assessment basis for corporation tax – attempts of this kind have already failed too often in Brussels: “We need harmonized taxation regulations in Europe specifically for the purposes of the capital market.”
Meyer wrote his dissertation on European financial issues at the University of Würzburg. The economist has also been familiar with the USA for a long time – he spent a year studying in Georgia in the early 1990s. The financial scientist later spent eight years at the International Monetary Fund – most recently as Executive Director for Germany.
However, Steffen Meyer spent the longest period of his career at the Federal Ministry of Finance. Until the end of 2021, he headed the sub-division “Fundamental issues of individual economic sectors/welfare state.” He then moved to the Chancellery with State Secretary Jörg Kukies.
At the Spreebogen, Meyer exchanges ideas just as closely with the Chancellor’s summit sherpa as he does with Undine Ruge, Olaf Scholz’s European policy advisor. The exchange with European colleagues was in turn one of Meyer’s most important tasks when he moved to his current position. “You get a feel for where other government headquarters set their priorities,” says Meyer.
He will benefit from this in the coming months when the EU Commission collects issues for the next legislative period – such as the German desire for a closer capital market union. Manuel Berkel
