Harmonising Ecological Necessity with Economic Efficiency

The collapse of the coalition talks in Berlin risks squandering a key opportunity to shape Germany’s energy transition by linking ecological goals with efficient economic regulation. The clean-energy transition poses enormous challenges. Accordingly, it is imperative to harmonise ecological necessity with economic efficiency. Germany is a prosperous country with a strong culture of public debate. Should Germany fail to meet the challenges in this area, it will sacrifice its role as a vanguard in climate policy.

It is pleasant to see more and more representatives of different social groups joining the conversation. The Federation of German Industries (BDI), for example, is currently producing a study on how the 2050 climate targets can be reached and the consequences this will have for the economy. Similarly, in collaboration with businesses and civil society associations, the German Energy Agency (DENA) recently published a study on the “integrated energy transition”, which considers options for transforming the energy system. A different study devoted to this topic was also recently published by the Union of the German Academies of Sciences and Humanities.

The German government’s key climate policy goal is to reduce greenhouse gas emissions by 80 to 95 per cent by 2050, in accordance with the Paris Agreement. This goal can only be attained through a wide-reaching process of structural change that will transform the Germany economy. Exactly what form this structural change will take is impossible to predict due to the breakneck pace of current technological development. The number of patent applications in the energy technology sector, for example, more than quadrupled between 2000 and 2012. Enormous efforts are being made to develop new storage technologies, and businesses in the automotive industry are investing heavily in R&D for the electric vehicles of the future.

Expanding the EU ETS to additional sectors

Against this backdrop, it is essential to develop economic instruments that neither privilege nor exclude any particular approaches. The most important of these is CO2 pricing, which will need to take account of ‘carbon leakage’. This means that harmful emissions will need to be priced in a uniform manner, while ensuring that facilities producing harmful emissions are not simply shifted to locations with lower emissions costs. This would not only harm the climate, but also the competitiveness of German industry.

All other factors being equal, uniform CO2 prices would also help ensure that a range of technologies can compete on a level playing field during the impending integration of the energy, heating and transport sectors. It would therefore seem sensible to expand the existing European emissions trading system to additional sectors and to introduce a uniform system of European CO2 pricing, as recommended by the German Monopolies Commission. While a national approach to CO2 pricing would also be conceivable, it would remain a second-best choice that would still have to address the problem of carbon leakage.

Whichever political parties come to form Germany’s next government, one of their most important tasks will thus be to fuse ecological necessity with economic efficiency.

This piece appeared on 23 December 2017 in the "Börsen-Zeitung".