Thank you. It’s great to be able to speak here. Over the years, Bruegel has become synonymous with excellent and policy-relevant research. Your work helps people like me to do our jobs better. That is also recognized by others. In the “2020 Global Go To Think Tank Index Report” published by the University of Pennsylvania only two weeks ago, Bruegel ranks as the number one non-US think tank in the world. That’s worthy of congratulations!
Let me start by taking you back thirty years ago, when Europe stood before the great economic challenge at that time: transforming the crippled communist economies of Central and Eastern Europe into modern market economies. When I worked at the IMF in the late 1990s, in our reports we referred to this group of countries as transition economies.
As Bruegel has also pointed out, thirty years later we are all transition economies now. Not only must we make our fossil-based economies carbon neutral by 2050, to prevent catastrophic climate change. But we must do so while recovering from a public health and economic crisis. I focus on climate change, but the challenge is really much broader. It includes all forms of environmental degradation that make our economies unsustainable.
Europe’s Green Deal tackles these multiple crises head-on. It is ambitious, it is comprehensive, and it focusses on growth. And with the Next Generation EU recovery package, and reinforcements to the EU budget, it is backed by unprecedented public financial firepower. The new Sustainable Finance Agenda that is coming out soon, will likely provide plans to mobilize much needed private investments. And that is exactly why the best economic response to the COVID crisis is to start implementing the Green Deal as soon as possible. After the euro crisis, after Brexit, Europe is leading the way, which makes me a proud European today.
But true leaders not only show the way. They also make sure everyone is on board. The introduction to the European Climate Law proposal states, and I quote:
The European Green Deal reaffirms the Commission’s ambition to make Europe the first climate-neutral continent by 2050.’
End of quotation.
Laudable in and of itself. But frankly, it would be much better for the planet if, by 2050, we were the last continent to be climate-neutral. Because that would mean that other nations have caught up with us and even surpassed us. And then the whole world will have become climate neutral before the crucial 2050 deadline.
I am optimistic that Europe will team up with the new American leadership, and possibly with China and India and others, to form the powerhouse, the engine, that gets the world back on track to meet the Paris agreement. Because in order to get the energy transition really done, we will need to work together in many areas. Because there’s not a European, or an American or a Chinese climate problem, there is only a global climate problem.
Now let’s go back to Europe. As we all know, getting the European economy sustainable for future generations requires large investments. A big part of these investments need to be made by the private sector. And for these private investments to scale up sufficiently, and for the financial sector to finance them, we need to get the right conditions in place. What needs to be done? And what can governments, central banks and supervisors do? That is what I want to discuss with you today.
First of all, we need a better business case for green investments. One policy instrument is absolutely key here, and that is to raise the effective price of greenhouse gas emissions. Carbon emissions are the main, but not the only contributor to greenhouse gases. You see, I’m an economist. Some may call it naïve, but I have this firm belief, backed by experience, that for economic transformation to take hold, you need to have relative prices that reflect the true scarcity of economic resources. In this case, by pricing in the climate cost of greenhouse gas emissions. Internalizing the externality. That will make it far easier for firms and households to determine the future value of their assets and liabilities. This will alter their incentive framework. Then, market forces will drive things in the right direction. This ball lies squarely in the court of governments. The EU Green Deal sets out ambitious plans to make carbon pricing more effective, and it is crucial these plans are not watered down. This is the one thing that makes all the other things…