German self-deception on energy costs
Far be it for me to presume to know more about fundamental economics than Germany’s leading experts in this field. But I can’t help but feel that the country is engaged in an act of collective self-delusion about the true scale of the costs in changing energy sources from fossil fuels to renewable.
This is not to say that such a transition is not desirable. But failure to be honest about its implications may come back to bite the country in the backside.
One example of this self-delusion is in how experts talks about subsidies for various energy sources.
Reading through the German press this week, one could come away with the impression that the government is handing out tens of billions of euros to the fossil fuel industry.
Leading left-wing economist Marcel Fratzscher wrote a column for Die Zeit titled “Schluss mit den gigantischen Subventionen für Kohle, Öl und Gas” (Stop the enormous subsidies for coal, oil and gas). In it, he claimed that Germany was spending €70 billion a year on subsidies for fossil fuels - an amount that equates to 1.9 percent of GDP.
A shocking number. Why would the oil giants, with their huge profit margins, be entitled to such gargantuan payouts from the state exchequer?
Look a little closer though and Fratzscher’s definition of a subsidy gives the game away. He defines it as the difference between the “true cost” of fossil fuels and the actual price that consumers pay for the refined product. For example, he concludes that the price of coal should be four times higher in order to reflect the costs of pollution for public health (reflected in higher health insurance contributions) and environmental damage.
This is an interesting thought experiment. But to my layman’s ear the thing he is talking about is not subsidies, which are financial transfers from the state coffers into the accounts of companies in struggling sectors. What he is actually saying is that taxes need to be raised on fossil fuels in order to cover all their costs for society.
There was another example of this category error this week.
On Thursday, the Federal Environmental Agency (UBA) published a list of all government subsidies which directly or indirectly fund the fossil fuel industry. The Süddeutsche Zeitung’s report on the list was titled “Umweltschädliche Subventionen in Milliardenhöhe angeprangert” (environmentally damaging subsidies worth billions are denounced). Other newspapers similarly claimed that the UBA had published a list of subsidies that amounted to €65 billion.
In reality, the list throws actual subsidies such as the Pendlerpauschale (commuter allowance) into the same pot as tax breaks for kerosene and diesel.
But subsidies and taxes are very different things. A subsidy puts money into an unprofitable industry (or unprofitable behaviour), while a tax takes money out of a profitable one.
Describing a tax break as a subsidy creates the impression that the fossil fuel industry is fundamentally loss making and is only being kept alive by state payouts (no doubt on the back of lobbying by the evil energy companies!)
But Fratzscher’s dream of jacking up the price of coal is only remotely plausible because the production of energy from coal costs so little in the first place. If that wasn’t the case, the industry wouldn’t withstand a doubling of the price let alone a quadrupling.
At the same time, the actual subsidies that are paid out to the tune of tens of billions every year to support the renewable energy industry are often referred to as a Förderung (funding) rather than the more negative sounding Subvention.
Renewable subsidies cleverly don’t appear on the state balance sheet. They are paid directly by the end user to the wind and solar companies in the form of a surcharge called the EEG Umlage.
The subsidy was created two decades ago to help renewables compete against fossil fuels. While it has been successful, it has come at a cost.
Even as renewable technologies have become better and taken up an ever great market share, the size of the subsidy has not come down. Last year, German households and businesses paid a record total of €31 billion over the EEG Umlage.
The ‘traffic light’ parties have now indicated they want to abolish the EEG Umlage in the next legislature in order to bring down electricity costs that are the highest in Europe. It is still unclear though whether the subsidies will be repackaged as something new or whether the renewable industry can now stand on its own two feet.
To be clear: I’m not arguing here that subsidies for renewable energy are not justified. Nor am I arguing against higher taxes on kerosene or diesel.
The point I’m trying to make is that, if economists and journalists don’t clearly distinguish between subsidies and tax breaks, they confuse people about the costs and risks coming their way.
It’s only if people know the difference that they can understand what affects certain policies are likely to have. By way of example, people need to understand that a higher tax on coal and gas is likely to be inflationary. (For economist Fratzscher, this is a desirable outcome - what he calls “green inflation”).
As I discussed last week, long-term inflation is a highly delicate matter in Europe, where the level of public debt means that the European Central Bank has its hands tied on inflation control.
At the same time, taxing profitable industries to subsidize (as yet) unprofitable ones is sacrificing current productivity for an intended future benefit. That might be a worthwhile goal, but it has an inevitable impact on competitiveness.
And even subsidies aren’t all equal. The Pendlerpauschale, for instance, supports people who have jobs in the inner city but live in the suburbs. A lack of living space in inner cities has forced (often poorer) people out into the Speckgurtel. Taking away this allowance is not only unfair, it is laden with political risk. A similar decision in France sparked the violent ‘yellow vest’ protests in 2018; the AfD would be rubbing their hands of something similar happened here.
The truth is: Germany embarked on its Energiewende adventure by building its vessel before all the parts has been finished. It is travelling down a bumpy road with an uncertain end point, and the people in the cheapest seats are the ones who have to put up with the fact that there’s no functional suspension.
These are all reasons to have an honest debate and not create the false impression that oil magnates are being thrown an Extrawurst by the government.