Now for the small print...
13 Theses on the German Energy Transformation
Thesis 1
The combustion of fossil fuels has increased the concentration of CO2 from 280 ppm to 380 ppm and has warmed the earth's temperature by presumably one degree versus the pre-industrial age. If business continues as usual, the earth's temperature could rise by three to five degrees, leading to climate zone changes and poverty-driven migration on a massive scale that could convulse the world. It therefore seems sensible to reduce the use of fossil fuels and replace them with other energy sources. In this sense the green movement is pursuing the right goals. The sole question is whether it is using the right instruments to achieve them.
Thesis 2
Bioenergy, which currently provides over half of the renewable energy in OECD countries, is not a sensible path to follow because of its negative impact on the food supply. The food crises of 2007/2008 were caused by a sudden doubling in the prices of grains, which, in turn, was presumably due to the rapid expansion of bioethanol production in the USA. Moreover, doubts as to whether bioenergy generates any positive effects on the climate seem justified by deforestation and the over-fertilisation of soil.
Thesis 3
Reduced fossil-fuel consumption by individual countries or regions of the world will not lead to any worldwide savings unless the extraction of fossil fuels also declines. If resource owners stick to their extraction plans, the volumes extracted are merely channelled to other countries via falling global market prices. Since CO2 emissions are proportional to fossil fuel extraction, they will not fall. Climate policy can only be effective if the supply-side is under control. To date the Green Party has not explained how it plans to achieve this. Hundreds of billions of euros are being spent on an environmental project without any prior attempt to prove its effectiveness.
Thesis 4
From a game theory point of view, European efforts cannot be expected to be matched by politicians from other countries. On the contrary, such efforts are far more likely to create freeriding incentives. If Europe keeps temperatures low, countries around the rest of the world can spare themselves the effort of limiting the temperature increase. This argument was presented in an expert report by the scientific advisory committee for the German Federal Ministry of Finance.
Thesis 5
For resource providers, the announcement to the world of a major energy reorientation is tantamount to that of expropriation and market destruction. They have reacted by accelerating extraction in order to collect their revenues before their markets are annihilated. This effect is known as the Green Paradox. Today's real energy costs are no higher than in June 1980, although resource stocks have become increasingly scarce, likely due to the Green Paradox. Germany's Green Party has failed to deal with this effect, just as it has ignored the supply-side of the climate problem altogether. However, since the Party intends to spend state funds, it has an obligation to prove the effectiveness of its climate policy.
Thesis 6
Climate policy can only be meaningfully implemented via worldwide cooperation between consumer countries. This involves extending to all countries the UN emissions trading system, which currently covers only 30% of global CO2 emissions via government commitments. China, the USA and India in particular must be brought on board. This would take the figure up to 70%, and it presumably would not take long to convince the remaining countries to take part. A demand cartel, which economists refer to as a monopsony, would also have the advantage of offering consumer countries the opportunity to purchase natural resources at lower prices and would thus prevent the gradual transfer of the world's wealth into the hands of resource owners.
Thesis 7
It would also be useful to switch from residence to source taxes on investment income across the board. While normal investors would not be affected, the financial income of resource suppliers would then fall, giving them a greater incentive to generate investment income in terms of capital gains on their natural resources, extracting them more slowly. This would slow down climate change, and the capital-hosting countries would receive higher tax revenues at the expense of the resource suppliers.
Thesis 8
Energy transformation proponents claim that power from renewable sources is cheaper than that from fossil fuels, arguing that the sun doesn't send a bill. In reality, however, Germany's energy transformation is extremely expensive. At around 30 cents per kilowatt hour, German consumers now pay double the price for their electricity than French consumers. Thanks to the Renewable Energy Act, German consumers had to pay around 13 billion euros more for green power than the conventional power equivalent in 2013. Energy-intensive industries are either relocating away from Germany, or have to be kept afloat through painful wage restraint. According to the German Federal Ministry of the Environment, the energy transformation will cost over a trillion euros, or about ten years' worth of German reunification transfers, or 330 high-speed rail links from Munich Central Station to Munich airport. The subsidies that have been pledged to the suppliers of renewable energy amount already to well over 100 billion euros.
Thesis 9
A steadily rising cost of green power is also to be expected as the generating capacity is expanded, since it is difficult to smooth out the volatile output of wind and solar power plants. It will become increasingly difficult to use the neighbouring countries' grids as buffers because these countries will protect their grids from overloads through so-called phase shifters installed at their borders. Offsetting the instability of green power with storage plants is extremely complex, because it is not merely a question of fluctuations at different times of the day or week, but of fluctuations throughout the year. To fully offset wind and solar power fluctuations, around 3,500 average-sized pump storage plants would be required in Germany, or one hundred times the number currently operating. In view of the exorbitant cost of building power storage plants, the only sensible alternative is to keep coal and gas-fired power plants as a reserve for contingencies, firing them up or throttling them down as needed. This duplicate supply structure, however, makes production costs soar.
Thesis 10
The Renewable Energy Act, which makes green power economically viable, is completely ineffective, since it conflicts with the European emissions trading system, which already caps CO2 emissions. The green power produced in Germany not only replaces power from fossil fuels, but also sets free the corresponding emission certificates. These certificates migrate via the markets to coal-fired power stations in other EU countries, where they facilitate an increase in CO2 emissions – or a reduction in savings – which exactly matches the German savings. This has not only been shown by a number of economists, but has also been stated by the scientific advisory committee of the German Federal Ministry of Economics, by the German monopolies commission and by the Intergovernmental Panel on Climate Change (IPCC) in its latest report.
Thesis 11
The Renewable Energy Act is not only ineffective, but also inefficient. Whatever the European emissions target is, it can be attained at the minimum cost via emissions trading because emissions trading sets a single price for CO2 across the board, and therefore aligns the marginal abatement costs in Europe for all emitters. The Renewable Energy Act distorts the allocation of the ensuing abatement efforts by burdening “fossil power” in Germany not only with the cost of emissions certificates, but also with the feed-in tariff charge. At every conceivable European level of CO2 emissions in the electricity generation sector aimed at via emissions trading, the population would enjoy higher living standards if there were no Renewable Energy Act.
Thesis 12
For similar reasons, the Renewable Energy Act also distorts incentives to establish green technologies in Europe. By lowering demand for emissions certificates and their price, it makes fossil power production cheaper for the rest of Europe. This, in turn, prevents the expansion of green power in other countries by depriving it of its economic advantage. The wind turbines and solar panels end up being set up in the wrong places and optimised for the wrong climatic regions. There is no proof that the Renewable Energy Act spawns more "green technology" or contributes to a higher cost degression for such technologies than emissions trading alone.
Thesis 13
The EU Commission is right to use competition law to question Germany's Renewable Energy Act. On the one hand, the Renewable Energy Act discriminates against green power imports from abroad because imported green power is not subsidised like its domestically produced counterpart. On the other hand, the Act also discriminates against the import of normal power from abroad because it burdens it with the cost of the Act's feed-in tariff, acting therefore like an illegal import duty. In this sense, Commissioner Joaquín Almunia's criticism is justified. The Renewable Energy Act should be abolished. Existing renewable energy plants should be subsidised for as long as contractually agreed, but help in the form of the special charge levied on fossil power via European emissions trading should be more than sufficient for new plants.