Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the effectiveness of the government’s new climate measures. “The target is huge. This is the moon landing of our generation.”
In late April 2023, Climate and Energy Minister Rob Jetten presented additional plans to still meet the government’s 2030 target - at least 55 percent less carbon emissions than in 1990. Interestingly, an additional tax on meat and air travel was not part of these plans, nor was a substantial reduction in livestock. How effective is this climate plan?
When it comes to climate measures, there are roughly three categories available to the government, says Knaap. Standardize, tax and subsidize. And each category has its pros and cons.
“Standardization could involve, for example, legal requirements to allow only combustion engines in cars with a maximum consumption of one in twenty. Another example is environmental zones in cities. The advantage of this is that it is clear. The disadvantage, however, is that a legal standard is susceptible to lobbying efforts - in this case from the auto industry - but above all it is a crude instrument. After all, should an ambulance on its way to an emergency meet such a consumption standard? And the grandmother who hardly ever drives her old diesel car, won’t she be hit unnecessarily hard? Not being allowed to drive to work is a very small sacrifice for some, but an insurmountable problem for others. Prohibition is therefore often a very blunt instrument and does not do justice to the difference in interest.”
Knaap believes that is why many economists are not very excited about standardization. They prefer taxation as an instrument to influence behavior.
“The economist says: if you want to reduce something, make it more expensive. So, if you aim to reduce carbon emissions, put a price on it. Those who absolutely have to go by car will gladly pay that price. And those who find it a bit expensive will take the train. You leave the decision up to the people themselves. On top of that, as a government, you collect taxes, which you can then use to reduce other taxes that distort the economy - for example, payroll taxes.”
However, there are also drawbacks to this instrument. Sometimes the environmental tax itself is so disruptive that, on balance, you disrupt the overall economy even more.
Everyone is terrified
But the biggest problem is that through such taxes you create more inequality between income groups, says Knaap.
“We have a progressive tax system precisely to reduce that inequality. If you make low-income people pay for their carbon emissions, they become even poorer. The right-minded economist then says that you should not pursue an income policy with an environmental tax and that in that case you should give those lower income groups a benefit or allowance. That way you still maintain the price incentive, is the reasoning. But the word ‘allowances’ terrifies people in the Netherlands these days. Implementation is already abysmal, so nobody wants to further burden it with new regulations. So, pricing is ideal in theory, but proves difficult in practice.”
From that perspective, then, it is not so bad that taxation and standardization play a smaller role in the government’s climate plan, and that subsidization has a larger role to play. Yet even that instrument is not without its downsides.
“In the new plans, the subsidy on electric cars is increased. But if you only subsidize electric driving, there is no incentive to choose the least polluting solution in general. Someone who has a choice between a big SUV and a small car has no incentive to take the smaller car that way. If you tax carbon emissions, on the other hand, you also encourage the more sustainable choice within the fuel car segment. After all, a big SUV would be more expensive to run in that case than, say, a Fiat Panda.”
The political reality is that subsidies are easier to sell to citizens and businesses, while you don’t win the popularity prize with new taxes, Knaap says.
“But in the end, those subsidies have to be paid for somehow, and as a rule, that is still done through taxation. In the long run, this puts pressure on the government budget. And there can also be inequality aspects to subsidies. Think of all the tax benefits for the purchase of Teslas, which, in the Netherlands, mainly benefited the higher income groups.”
All in all, you want people to be incentivized as much as possible to do the right thing. And in that respect, according to Knaap, the new package of climate measures is “suboptimal”.
“A highly polluting factory that can become slightly less polluting is still better than a Dutch citizen switching from a fuel car to an electric car. But there are few incentives for that factory in the current package of climate measures, because the instrument of subsidization is so often resorted to, even though much of the emissions in the Netherlands are not caused by citizens, but by industry.”
Then again, the already existing carbon trading system for large companies does work well in making industry more sustainable, Knaap notes.
“In a perfect world, you would implement those sustainability incentives right into the capillaries of the economy, but there are all kinds of practical objections that prevent us from doing that. Individual behavior of citizens is much harder to control than that of industries, because you can talk to industries individually as a government. And unlike citizens, companies cannot end up at the food bank if you introduce a tax.”
When it comes to the effectiveness of recent climate plans in the Netherlands, we do need to be realistic, says Knaap.
“The target is huge. This is the moon landing of our generation. Within a few years, the entire energy infrastructure has to be turned upside down. That is a gigantic and thorny operation that includes elements we don’t even know how to implement yet. Some problems will have to be solved along the way. But you have to start somewhere. If you don’t do anything, you can be sure you won’t reach the 2030 target. In any case, what does strike me is the broad support there is for this kind of climate action these days, despite the hefty expenses involved. That is encouraging.”