German Climate Policy: Economic Criticism of CO2 Pricing

_ Yuri Kofner, economist, MIWI Institute for Market Integration and Economic Policy. Munich, June 19, 2021.

Two alternative approaches to carbon pricing

From a value-conservative and market-liberal point of view, one can in principle have two approaches to the subject of CO2 savings.

The first approach is of the opinion that anthropogenic CO2 emissions have no significant negative impact on the climate and global warming.

On the one hand, as the economist J.G. Hülsmann one can assume that the advantages of global warming could outweigh its disadvantages. [1] Two examples could be cited for this: According to a gravity simulation by the Dutch Office for Economic Policy (CPB), the opening of the Arctic North Sea Route will increase Germany’s GDP by almost 0.3 percent. [2] A German study estimates that global warming will improve domestic crop yields and thus increase Germany’s net agricultural income by 5-6 percent in 2040. [3] That would correspond to an increase in German GDP of 0.1 percent.

On the other hand, one can be convinced that not humans, but natural and cosmological processes, such as solar radiation and the water vapour content in the atmosphere, are more decisive for the climate. [4]

The logical conclusion of the first approach is that any CO2 taxes, emissions trading systems and CO2 border adjustment mechanisms have no raison d’être to internalize positive or non-existent external effects of the consumption of fossil fuels and are therefore not justified.

The second approach shares the currently widespread view that anthropogenic CO2 emissions can have a noticeable or even significant negative influence on the climate and global warming. In such a case, one would have to agree that certain measures should be taken “as a precaution” to reduce global CO2 emissions – to internalize the negative external effects of CO2 emissions. Another aspect of this logic could be the environmental concept of saving resources, including saving CO2.

At this point, however, it should also be explained that the potential future economic damage caused by global warming is extremely difficult to determine and the results of the model estimations vary widely: amounting to between 7 and 818 euros “per tonne of CO2.” [27 ], [28]

CO2 savings: market-based, open to innovation and global

If one follows the second approach, one would therefore have to carry out an economic cost-benefit analysis of the best possible (German) CO2 reduction policy.

In principle, these considerations should run as follows:

“The climate doesn’t care from whom, from where and how the CO2 gets into the atmosphere, but the German economy does care a lot”.

This means that the value-conservative and market-liberal approach to CO2 savings must meet three criteria: it must be market-based, technology-open and global.

In the opinion of the economist Hans-Werner Sinn and the ifo Institute, a purely national or only Western solo effort in reducing CO2 emissions wpuld be absolutely counterproductive. This is known as the so-called “Green Paradox”: [5]

First, Germany’s share of global CO2 emissions was less than 2 percent in 2019. [6] Even complete German “carbon dioxide neutrality” would hardly change anything in terms of global CO2 emissions.

Second, national or transatlantic (EU, UK, USA) or western pricing of CO2 only leads to: a. the emigration of German industry to countries where there is no CO2 price burden; and b. that imports from these countries will displace the more expensive CO2-priced goods on the domestic and global markets. This is the so-called “Carbon Leakage”. It is pure de-industrialization.

A French meta-study from 2013 found that the effects of carbon leakage on the GDP of unilaterally acting countries can amount to minus 1.6 percent. [7]

Third, a purely national or purely western decline in the demand for hydrocarbons – caused by the CO2 pricing – only leads to the fossil fuels becoming cheaper on the global market. As a result: a. Oligarchs and oil sheikhs will extract these fossil fuels more and more quickly in order to be able to pay their (court) state as long as the demand for oil and gas is still there, or until they have managed to diversify their own economy enough. b. Other countries will burn more of the fossil fuels that have become cheaper in larger quantities, and thus will also blow more CO2 into the air. As a result of a German and Western go-it-alone way of saving CO2, even more carbon compounds will being extracted from the earth and emitted into the atmosphere. That is the “Green Paradox”.

Global climate club with ETS and CBA

If the goal of CO2 savings were to be taken really seriously, and if that were also politically wanted, then that would only work if the majority of global CO2 emitters would also participate – above all: China (28 percent of global CO2 emissions in 2019), the USA (15 percent), India (7 percent), the EU (9 percent) and Russia (5 percent). Overall, these actors account for 64 percent of global CO2 emissions.

That is the concept of a “climate club”. Within the climate club there would then be CO2 emissions trading system “on everything” or on most carbon-intensive economic sectors (transport, shipping, construction, industry, energy, etc.). This idea is supported, among others, by the IW Cologne [8] and the IfW Kiel [9].

An emissions trading system (ETS) starts directly at controlling the amount of CO2 emissions. It works according to the “cap & trade” principle: The total amount of CO2 emissions that is maximum permitted in the recorded sectors in a certain period of time is limited, i.e. “capped”, and then gradually reduced until the desired reduction in the amount of CO2 emissions has been achieved. The total amount of CO2 is divided into emission rights (certificates), each of which entitles the holder to emit a certain amount of CO2. The certificates are tradable. Due to the shortage and tradability of certificates, a certificate price is created for them on the “CO2 market”, which in turn is intended to provide incentives for cost-effective CO2 emission reductions.

Of all CO2 pricing methods, international emissions trading would be the most market-based, technology-open and also most effective in terms of carbon policy. Because then producers and consumers in the countries of the Climate Club would be able to freely and independently decide how and where to save CO2. At the same time, the resource allocation process of the emissions market via the market-based price signals would mean that producers would invest in the most CO2-saving technologies and that consumers would most likely buy them. And all that would be possible without the perfidious bans and subsidies, envisioned by the German Greens and left-wing parties. [10]

At the outer border of this international climate club there would be the so-called CO2 border adjustment mechanism (CBA or CBAM) – something like a CO2 tariff. On the one hand, this would slightly reduce the above-mentioned “carbon leakage” – according to studies by around 6 percent, [11] but it would also be a strong incentive for third countries to become members of the climate club.

In contrast, national and even transatlantic solo efforts would be absolutely nonsensical, both economically and in terms of “carbon policy”. So according to the motto: if you already want to price CO2, then at least only in a market-based, technology-open and global way.

At the moment, however, it is highly unlikely that such a climate club will come about and that actors of different degrees of economic development, e.g. China and the EU, could agree on a uniform price for CO2 certificates.

Of course, the ETS and CBA would also mean an additional burden for the German economy: According to a study commissioned by the Finnish government, the planned expansion of the emissions trading system to other sectors and the introduction of the CO2 border tax will reduce German gross domestic output by 0.03. Possible tariff retaliation measures from third countries, e.g. from China, could cause German GDP to shrink by a further 0.3 percent. [12]

German CO2 tax: expensive, anti-social, counterproductive

In addition, such a climate club would have to completely (!) replace all other (!) national and EU-wide CO2 taxes and left-green bans with the above-mentioned CO2 emissions trading within and CO2 border adjustment outside the climate club. Anything else would be neither market-based nor technology-open and absolutely unsocial.

E.g., Paltsev et al. (2018) estimated the average avoidance costs due to stricter fleet emissions limits in the EU to be more than 1000 euros per tonne of CO2. [26]

The government and the Greens outdo each other with a CO2 tax

At the beginning of 2021, i.e. at the height of the Corona crisis in Germany, the CDU/CSU – SPD federal government coalition introduced a CO2 tax in transport of 25 euros per ton. According to previous plans, it wanted to increase this to 55 euros by 2025.

As part of a further tightening of the climate targets, the CDU is now calling for the CO2 price to be increased to 45 euros as early as 2022. The increase to 55 euros per tonne of CO2 is to be brought forward to 2023, which is then to be increased to 65 euros in 2024. [13]

The more radical Greens are calling for the CO2 price to be increased to 60 euros per ton as early as 2023. Accordingly, the Green Chancellor candidate Annalena Baerbock has called for a further increase in the price of petrol of 16 cents in accordance with her party’s draft program. [14]

As a result, CDU parliamentary group leader Ralph Brinkhaus made it clear that even with the CDU at the head of the future federal government, petrol would become more expensive – according to calculations by 15.5 cents. And, “in the second half of this decade it will become really expensive” – ​​he added. [15]

Unsocial additional burden for citizens and the economy

The introduction of the CO2 tax in 2021 led to a surge in fuel prices: from June 2020 to June 2021 by 30 cents per liter of petrol and by 25 cents per liter for diesel. [16]

Comparative studies by the IAE show that Germany already had the world’s highest gasoline prices in June 2020. [17]

Analyzes by the IW Cologne show that taxes in Germany now make up two thirds of the price of petrol and around 60 percent of the price of diesel, while fluctuations in the price of oil are hardly noticeable at the petrol station. [18]

According to the DIW [19] and the ifo Institute [20], a C02 tax is regressive and anti-social, since it burdens poorer households more than richer ones, since the poor have to spend a greater proportion of their income on transport and heating than the rich.

According to calculations by the IW Cologne, the implicit CO2 pricing in Germany for petrol at 300 euros per tonne of CO2 and for diesel at 190 euros per tonne of CO2 is 140 euros and 70 euros higher than the EU Energy Tax Directive (ETD). [21]

For these reasons, three quarters of Germans reject the  CO2-tax increase on petrol prices. A switch from internal combustion engines to electric drives in cars is also rejected by 57 percent of the population. [22]

According to calculations by the IMF, the economic costs of the CO2 tax of 60 euros per ton are around 0.2 percent of German GDP up to 2030. [23]

A study by the Boston Consulting Group together with Prognos estimates that the federal government’s CO2 reduction targets will require additional costs of 1.5 to 2.3 trillion euros by 2050. This corresponds to average annual additional costs of around 1.2 to 1.8 percent of the German gross domestic product. [24]

Counterproductive in terms of climate policy

As a Pigou tax, CO2 taxes are suboptimal because the damage caused by CO2 emissions is, as mentioned at the beginning of this policy note, difficult to quantify scientifically and therefore difficult to internalize.

As described above with the effects of the “Green Paradox”, a national, European and even transatlantic solo effort via a CO2 tax would be economically ineffective and, in terms of climate policy, absolutely counterproductive.

In addition, it should be noted that over their entire life cycle, with the current and medium-term German electricity mix (until around 2035), e-cars emit more CO2 and other pollutants than conventional combustion engines. [25]

References

[1] Hülsmann J.G. (2020). Toward a Political Economy of Climate Change. MISES Institute. URL: https://mises.org/wire/toward-political-economy-climate-change

[2] CPB (2015). Schmelzende Eiskappen und die wirtschaftlichen Auswirkungen der Öffnung der Nordseeroute. URL: https://www.cpb.nl/sites/default/files/publicaties/download/cpb-discussion-paper-307-melting-ice-caps-and-economic-impact-opening-northern-sea-route. pdf

[3] Auerbachr J. et al. (2010). Assessing the impact of climate change on agriculture in Germany – a Ricardian analysis. Universität Hohenheim. URL: https://ideas.repec.org/p/ags/iatr10/91257.html

[4] Siehe, z.B.: Lünig S. (2020). Stellungnahme zur Drucksache 18/3689 des Bayerischen Landtags: Expertenanhörung: Klimaschutz – Bayern muss handeln! URL: https://kaltesonne.de/wp-content/uploads/2020/02/stellungnahme-muenchen.pdf

[5] Sinn H.W. (2020). Möglichkeiten und Grenzen der europäischen Energiewende – Perspektive eines Volkswirtes. ifo Institut. München. URL: https://www.hanswernersinn.de/de/moeglichkeiten-grenzeneurop-energiewende-ake-dpg-02102020

[6] Global Carbon Project (2020). Supplemental data of Global Carbon Budget 2020 . https://doi.org/10.18160/gcp-2020

[7] Branger F., Quirion P. (2013). Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies. Ecological Economics 99: 29-39, https://doi.org/10.1016/j.ecolecon.2013.12.010

[8] Kolev B., Bardt H. (2021). Trade Club for Climate. IW Cologne.  URL: https://www.iwkoeln.de/studien/iw-policy-papers/beitrag/galina-kolev-hubertus-bardt-trade-club-for-climate.html

[9] Bierbrauer F., Felbermayr G. et al. (2021). A CO2-Border Adjustment Mechanism as a Building Block of a Climate Club. IfW Kiel. URL: https://www.ifw-kiel.de/publications/kiel-policy-briefs/2021/a-co2-border-adjustment-mechanism-as-a-building-block-of-a-climate-club-16065/

[10] Menner M., Reichert G. (2019). CO2-Steuer oder Emissionshandel? EU-Vorgaben und Optionen für eine CO2-Bepreisung in Deutschland. cep. URL: https://www.cep.eu/fileadmin/user_upload/cep.eu/Studien/cepAdhoc_CO2_Bepreisung/CO2-Steuer_oder_Emissionshandel.pdf  

[11] Felbermayr G., Peterson S. (2020). Economic assessment of Carbon Leakage and Carbon Border Adjustment. IfW Kiel for the European Parliament. URL: https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/603501/EXPO_BRI(2020)603501_EN.pdf

[12] Prime Minister’s Office of Finland (2020). Carbon Border Adjustment Mechanisms and Their Economic Impact on Finland and the EU. URL: https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/162510/VNTEAS_2020_48.pdf

[13] Schuller K. (2021). CDU will CO2-Preis steigern und Strom billiger machen. FAZ. URL: https://www.faz.net/aktuell/politik/klima-cdu-will-co2-preis-steigern-und-strom-verbilligen-17341384.html

[14] Junge Freiheit (2021). Grünen-Wahlprogramm: Mehr Einwanderung, mehr Klimaschutz, mehr Steuern. URL: https://jungefreiheit.de/politik/deutschland/2021/gruenen-wahlprogramm-einwanderung-klimaschutz-steuern/

[15] Tagesschau (2021). Benzin wird auch mit der Union teurer. URL: https://www.tagesschau.de/inland/gesellschaft/klimaschutz-benzinpreis-cdu-101.html

[16] Junge Freiheit (2021). Benzinpreis springt nach oben – Strom so teuer wie nirgendwo in Europa. URL: https://jungefreiheit.de/wirtschaft/2021/benzinpreis-strom-strompreis-europa/

[17] IAE (2021). Durchschnittliche Benzinpreise pro Liter im Vergleich ausgewählter Länder im Juni 2020. URL: https://de.statista.com/statistik/daten/studie/242003/umfrage/durchschnittliche-benzinpreise-im-vergleich-ausgewaehlter-laender/

[18] Schaefer T. (2021). Sprit wird deutlich teurer. IW Köln. URL: https://www.iwkoeln.de/presse/iw-nachrichten/beitrag/thilo-schaefer-sprit-wird-deutlich-teurer.html

[19] Ismer R. et al. (2019). Sozialverträglicher CO2-Preis: Vorschlag für einen Pro-Kopf-Bonus durch Krankenversicherungen. DIW. URL: https://www.diw.de/de/diw_01.c.673222.de/publikationen/diw_aktuell/2019_0021/sozialvertraeglicher_co2-preis__vorschlag_fuer_einen_pro-kopf-bonus_durch_krankenversicherungen.html

[20] ifo Institut (2021). Wie fair ist die Energiewende? Verteilungswirkungen in der deutschen Energie- und Klimapolitik. URL: https://www.ifo.de/publikationen/2021/aufsatz-zeitschrift/wie-fair-ist-die-energiewende-verteilungswirkungen-der

[21] Wendland F.A. (2021). Zwischenbilanz der steuerlich impliziten CO2-Bepreisung. IW Köln. URL: https://www.iwkoeln.de/studien/iw-kurzberichte/beitrag/finn-arnd-wendland-zwischenbilanz-der-steuerlich-impliziten-co2-bepreisung-507312.html

[22] Tagesschau (2021). ARD-DeutschlandTrend vom 10.06.2021. URL: https://www.tagesschau.de/inland/deutschlandtrend/deutschlandtrend-2653.html

[23] IMF (2019). Fiscal Policies for Paris Climate Strategies—from Principle to Practice. URL: https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/05/01/Fiscal-Policies-for-Paris-Climate-Strategies-from-Principle-to-Practice-46826

[24] BCG (2018). Climate Paths for Germany. URL: https://image-src.bcg.com/Images/Climate-paths-for-Germany-english_tcm9-183770.pdf

[25] VDI (2020). Ökobilanz von Pkws mit verschiedenen Antriebssystemen. URL: https://www.vdi.de/fileadmin/pages/vdi_de/redakteure/vor_ort/bv/braunschweiger-bv/news/News_BV/VDI-Studie_OekobilanzPkw_Internet.pdf

[26]  Paltsev S. et al. (2018). Reducing CO2 from Cars in the EuropeanUnion. MIT. URL: https://econpapers.repec.org/article/kaptransp/v_3a45_3ay_3a2018_3ai_3a2_3ad_3a10.1007_5fs11116-016-9741-3.htm

[27]  Tol R. (2009). The Economic Effects of Climate Change. University of Sussex. URL: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.2.29 

[28]  Nordhaus W. (2019). Climate Change: The Ultimate Challenge for Economics. Yale University. YURL: https://www.aeaweb.org/articles?id=10.1257/aer.109.6.1991 

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