Germany’s Energy Transition Is Spectacularly Inefficient

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Just in time for the upcoming climate conference in Marrakech, Germany’s council of economic experts, the Sachverständigenrat, is appealing to the government to change tactic towards a global climate policy. Germany’s energy transition is beyond reform.

Not for the first time, scientific advisers to the government find themselves having to question the government’s energy transition. In its latest annual report, the German council of economic experts was particularly explicit in its criticism. Not only because it is touch and go whether national climate goals will be reached – despite steeply rising costs for citizens and businesses. No, Germany is undermining climate protection itself with its uncoordinated solo effort: at home, in Europe and in the context of international climate policy. Germany is giving other countries a master class in how top-down economic planning and micro-management nibble at the economic substance of a country, and will find it hard to get anyone to follow its example. On the contrary, other states can look forward to seeing energy-intensive manufactured goods being produced more cheaply outside of Germany, while the imports coming into Germany will bring back greenhouse gas emissions with them.

In its 2016/17 annual report, published on November 2, the Council arrives at a disappointing interim assessment of Germany’s energy transition. The ambitious climate goals and confused jumble of activities simply cannot be made to fit together. Reducing greenhouse gases by 40% by 2020 will not be possible. The goal of reducing primary energy consumption by 20% compared with 2008 is almost impossible to achieve. Only the objective of growing renewable energy sources as a share of gross energy consumption to 18% should be attainable, based on their rapid adoption in the electricity sector.

But that is exactly where they are part of the problem. There has been no substantial reduction in emissions in the power sector for a long time. Renewable energy as a share of gross electricity consumption has increased to almost 32% in 15 years, but this change is invisible in the climate footprint. Cheap coal and natural gas have to be deployed when the wind doesn’t blow and the sun doesn’t shine. A replacement for nuclear energy was also needed after several nuclear power plants were shut down ahead of schedule. Between now and the final exit from nuclear power in 2022, the gap will only grow larger. Calculated emission savings from using renewable energy sources in electricity production in effect went up in smoke in emissions trading. Across Europe, fossil power plants can afford to emit more when green German power exerts downward pressure on the price of the set amount of emission allowances.

There has been almost no movement in the transport sector over the past two-and-a-half decades, neither in the area of greenhouse gas emissions nor in primary energy consumption. Only manufacturing industry, commerce, trade and services as well as private households have consistently remained on track. This progress has come at a price. These sectors bear the lion’s share of the costs of the energy transition in the power sector. Apart from subsidising renewable energy sources through the levy on electricity prices, they also have to bear the costs of expanding the grid and integrating volatile green power into it.

According to estimates by the prestigious Düsseldorf Institute for Competition Economics (DICE) on behalf of “Initiative Neue Soziale Marktwirtschaft” (INSM), about €150bn had accumulated for the energy transition in the electricity sector by 2015. If the process continues in accordance with the federal government’s wishes, the sum will exceed €500bn by 2025. This is in addition to numerous other climate protection-related burdens in transport, housing and other areas of daily life and will inevitably impact economic competitiveness. The problem cannot be played down by pointing out the low share of energy costs of medium-sized companies, as the supporters of the energy transition are wont to do. Companies have to start worrying about their competitiveness when their energy costs are just slightly higher than those of their foreign competitors.

The environmental ministry is already planning to tighten the screws further. In the current draft of the 2050 climate protection plan, the intention is to codify the nation’s mixed bag of sectoral goals and accompanying activities far into the future. As not every department is willing to bite this bullet – even within the federal government itself – a bitter battle has been raging for months about every section of the document. At present there are no indications when this coalition quarrel will be resolved.

For most members of the council of economic experts, the cost-benefit ratio of the German energy transition is dismal: national solo efforts and centralised industrial policy under the guise of climate protection are the wrong way. There will be an enormous negative impact on society’s willingness to accept this enormous projects once citizens realise how little impact the energy transition has on effective climate protection.

Accordingly, the government’s scientific advisers don’t waste their time advocating small-scale reforms of the energy transition. This panel of experts does not have cosmetic changes to the renewable energies law in mind – the type of changes which the German Chancellor described in her press statement at the handing over of the annual report as being important steps towards market conformity. Instead of stumbling from one mistake to the next in its nationally fixed climate and industrial policy, the federal government should commit honestly to global climate protection. This means standing up for globally oriented, market-based climate protection instruments, like emissions trading or greenhouse gas reviews, during climate negotiations – the only way of making transparent to everybody just how much climate change really costs. This brings forth incentives supporting interventions in consumption and investment in areas where it makes sense both for the climate and for citizens’ pockets.

The international division of labor is not only a growth driver, but also the best way to reduce global climate protection costs. In future, the international community should not spend all its energy on arguing about the national shares of emissions reductions, but rather lead open discussions about fairly dividing up the total costs of climate protection. Nothing is stopping the wealthier economies from absorbing the lion’s share of climate protection costs. However, they have to accept that it is not enough to implement climate protection just in their own countries, at enormous expense. Even if rich countries forego being equipped with a large stock of emission allowances in favor of the economic development of poorer countries, they could profit in the longer term because emissions would be avoided globally at minimal cost. That would be a tremendous step up from ambitious solo efforts, and not just for the climate. At the next UN climate conference in Marrakech, Environment Minister Barbara Hendricks will have the opportunity to take this advice from the council of economic experts to heart. Germany could improve its reputation by becoming a pioneer of climate policy sanity.

Steffen Hentrich
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