Fairness and acceptability of environmental externality pricing in Europe

Policy Study

Environmental externality pricing has been long promoted to address environmental problems. The theoretical advantages of this type of strategy in terms of efficiency and effectiveness has however not been sufficient to ensure its widespread adoption in practice.

Environmental externality pricing has indeed faced resistance, in particular for being perceived as unfair, inequitable and/or unacceptable. This study explores this burning issue, by focusing on climate change mitigation in the European Union. More precisely, it interrogates how the EU has addressed the interrelated issues of acceptability, fairness and equity in a series of measures in this area. These are the EU emission trading system (ETS) and three proposals contained in the Fit for 55 Package: the proposed revision of the EU-ETS, the revision of the ETD, and the introduction of the EU- CBAM.

By providing a systematic analysis of the aforementioned measures, we seek to bring clarity to the EU climate change policy that can serve to improve the policy-making process. This discussion is particularly timely as the three proposals represent key measures in achieving EU climate objectives. The current context, in particular the remaining consequences of the COVID pandemic and the Ukraine war, have been putting pressure on EU institutions. Energy and food price rises make adopting externality pricing policies more difficult to achieve. The failure to adopt the package, or the adoption of watered-down measures, could put at risk EU’s fulfilment of its obligations under the Paris Agreement.