Increasing carbon pricing in the EU: Evaluating the options

A streamlined model, applied at the member state level, is used to evaluate possibilities for greater reliance on carbon pricing to meet the European Union's mitigation pledge for the Paris Agreement. The economic welfare costs of currently envisioned policies—including the Emissions Trading System (ETS), requirements for energy efficiency, vehicle emission rates, and national targets for non-ETS emissions—are estimated at 1.1% of EU GDP in 2030, or €167 per ton of carbon dioxide (CO2) reduced. On net these policies lose a small amount of revenue (0.05% of EU GDP). A series of reforms progressively extending emissions pricing across sectors and countries reduces costs by about 0.6% of 2030 EU GDP, or €90 per ton of CO2 reduced, while increasing revenues by almost 1% of EU GDP. Higher emissions prices in the EU ETS would create the largest welfare gain, and no country is made worse off from this reform.