Barriers on the Path to the Energy Turnaround
Jul 1, 2013
On behalf of the expert commission for research and innovation of the Stifterverband für die Deutsche Wissenschaft (Association for the Promotion of Science and the Humanities), the Ifo Institute investigated the energy, environmental and innovation policy instruments that are to be used to facilitate the energy turnaround. Ifo researchers find that there is an urgent need to improve both the European emissions trading system and the current system for subsidising renewable energies. A great deal of fine-tuning is also required to harmonize both instruments.
The German federal government's energy concept also requires far-reaching structural changes, which should be possible by introducing a whole bundle of aims and measures. Environmental goals to guarantee energy supply security must be achieved on the one hand, while the targeted transformation in structure should also be implemented in an economically efficient manner on the other. Dr. Ursula Triebswetter, Dr. Tilmann Rave and Dr. Johann Wackerbauer, experts from Ifo's -Energy, Environment and Exhaustible Resources Department, analyse the current policy mix in research report Nr. 61. The main part of the study assesses the ETS and the subsidy of renewable energies in terms of their efficiency. It also investigates the impact of the interaction of both instruments.
The authors reveal serious flaws in the ETS. One of its major deficits is that only roughly half of greenhouse gas emissions are covered by the trading system and that the current price for emissions certificates of below 5 euros per ton are significantly below the estimated costs of the damages caused by every additional ton of CO2 emitted. As a result, there are insufficient incentives to invest in new technologies. "If the currently existing emissions trading system were to remain the only climate policy instrument, there would be too few technological developments in the field of climate neutral energy technologies in the long term," explains Ifo expert Rave.
The Ifo study also highlights serious shortcomings in the subsidy of renewable energy. The subsidy of renewable energy via the EEG (Germany's Renewable Energy Act) is too strongly geared towards its direct use in the supply system, and too little towards basic and applied research. Expenditure on subsidies for research into renewable energies amounts to only a fraction of spending on the promotion of the use of renewable energies; and in 2011 this figure was only around 3%. Moreover, the EEG subsidy conflicts with the objective of reducing emissions per unit of renewable electricity as cheaply as possible – largely due to the high EEG costs of subsidizing photovoltaic. Moreover, the current integration of renewable energies in the energy supply system is not efficient either, since high network and system costs arise from current feed-in regulations, so that energy supply security can be guaranteed. "Overall there is a great deal of evidence to suggest that the cost-cutting and innovation potential of publicly-subsidized research into renewable energies and their system integration into the Germany system has not been consistently harnessed", adds Rave.
Ifo experts view the interaction between the EEG and the ETS as particularly critical to the implementation of climate policy goals. The greatest efficiency deficits lie in this area. The fundamental problem is that additional policy instruments that directly target CO2 reductions like the EEG may lead to a reduction in emissions from some emissions sources, but also lower demand for emissions certificates at the same time. This leads to a drop in the CO2 price and a transfer of emissions abroad and/or to other emissions areas within the ETS. Moreover, achieving CO2-reduction targets costs more, since the relatively cheap ways of cutting emissions such as, for example, implementing energy saving measures in industry, are replaced by, in some cases, very expensive renewable energy that is mainly financed by consumers.
To improve the impact of climate policy instruments, the authors suggest reviewing the setting of the emissions cap and further tightening it. This would stabilise future price expectations and promote the strategic planning of long-term investments in plants and technologies with low CO2 emissions. Moreover, trade with certificates should be extended to all greenhouse gas emitting sectors and provisions should be made to offset extreme price fluctuations in the ETS. In the framework of the promotion of renewable energies Ifo's experts also argue that research and development into renewable energies should be more heavily subsidised. Moreover, they highlight that there are more efficient ways of integrating renewable energies into the existing energy supply system than currently applied in the framework of the EEG. A revised market premium model could meaningfully compliment the definition of electricity prices, instead of decoupling renewable energy subsidies from market mechanisms, as has been the case to date in the fixed price system. Given the deficit of public information, it would seem advisable to set market premiums by holding competitive auctions.
Dr. Tilmann Rave
Ifo Center for Energy, Climate and Exhaustible Resources