A European response to US climate subsidies?

_ Dr. Ulrich van Suntum, honorary professor, University of Münster, former Secretary-General, German Expert Council for the Assessment of Overall Economic Development (SVR). 4 May 2023.*

Statement in the context of a hearing of the Economic Committee of the German Bundestag on 10 May 2023 on the following three documents:

  • Motion of the CDU/CSU parliamentary group: A European response to the US Inflation Control Act – Strengthening Europe as a business location, expanding the transatlantic partnership – BT-Drucksache 20/5352.
  • Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions: An Industrial Plan on the Green Deal for the Climate Neutral Age COM(2023)62 final; Council Doc. No. 5933/23.
  • Motion by Christian Leye, Alexander Ulrich, Dr Gesine Lötzsch, other MEPs and the parliamentary group DIE LINKE: Preventing deindustrialisation: Active industrial policy for climate and employment as a robust response to the US law to Inflation Control Act BT-Drucksache 20/6545

Preliminary remark

The following explanations are based on the working hypothesis that the emission of CO2 and other greenhouse gases is accelerating climate change, and that this is associated with serious problems for the whole of humanity. The examination of this hypothesis does not fall within the field of economics.

On the climate policy objective

In all three documents, climate neutrality of the European Union is formulated or assumed as a goal. A “European Green Deal” should reduce the EU’s CO2 emissions to “net zero” by 2050. In turn, it is hoped to achieve a “limitation of the rise in global temperatures”. To what extent this is realistic is not discussed in any of the three papers. EU greenhouse gas emissions in 2020 were 3.4 billion tonnes of CO2 equivalent, 32% lower than in 1990.[1] At the same time (1990 to 2018), global emissions increased by 66%.[2] The EU’s current share of global greenhouse gas emissions is greenhouse gas emissions is 9.5% (Germany’s is 1.8%).

However, it should not be concluded from this that if the EU were to reach its net-zero target, global greenhouse gas emissions would fall by 9.5%. This is because global greenhouse gas emissions continue to show an upward trend. This is due, on the one hand, to the continuing increase in the world’s population and, on the other hand, to the fact that the level of prosperity and thus also the energy consumption in the less developed countries is tending to rise. On the other hand, the increasing climate neutrality of the EU leads to relocation effects, which Hans Werner Sinn has described as a “green paradox”: Industries move to less climate-conscious and less costly countries and tend to emit even more CO2 there than they had in the EU. In addition, the ban on fossil fuels in the EU lowers global demand for them and thus tends to lower their world market price. This in turn increases their consumption elsewhere in the world, especially since the suppliers of these energy sources (such as OPEC) have no interest in one day sitting on their resources. of being stuck with their resources one day.

One would have expected that, given the importance of the issue and the gigantic sums already being spent on climate protection in the EU, such questions would be given attention in the papers. Unfortunately, this is not the case. Nor is there any discussion of the extent to which measures to adapt to climate change (adaptation) are more sensible and efficient than unilateral attempts to slow or stop it (mitigation). This question was also raised by the German Council of Economic Experts in its Special Report on Energy Policy 2019, but it has hardly been taken up by policymakers so far.[3] None of the above-mentioned documents say anything about these fundamental questions, nor are there any references to other studies on the subject.

From both an economic and an ecological perspective, it is also doubtful whether climate neutrality of individual countries, regions or sectors is even a sensible goal. With limited resources, climate protection measures should always be implemented first where the greatest effect can be achieved with a given amount of resources. However, the costs of reducing an additional tonne of CO2 in a sector or region increase the more ambitious the target is set there. This is a very general economic principle because it is obvious that one always begins to save where the effort is still relatively low. It must therefore always be weighed up whether, instead of the maximum target of “net zero” in one area, the same climate effect could not be achieved elsewhere with less effort. For this would mean more climate protection at the same time as lower costs for humankind.

This principle calls into question the EU’s “net zero” target. Climate protection is a global problem where ecologically it does not matter where and how CO2 is saved. Economically, however, this is by no means indifferent, because the costs of saving a tonne of CO2 vary greatly around the world. For example, saving a tonne of CO2 in industry in Germany costs about ten times as much as in China, where, moreover, almost one third of all CO2 emissions take place (with an upward trend). In other countries, CO2 savings are far cheaper and thus more efficient, as the German Council of Economic Experts pointed out in its 2019 special report.[4] Instead of trying to eliminate the last tonne of CO2 in Germany at immense expense, it would therefore be possible to achieve significantly more for climate protection in other countries at the same cost.

However, this in no way means that the EU would shift responsibility for climate protection to other countries. Rather, it could provide financial and technical support to poorer countries where a great deal could be achieved for global climate protection with comparatively little effort.[5] This would make more sense both economically and ecologically than pursuing the maximum goal of “climate neutrality” in the EU itself, especially since its effects on world temperature would be insufficient anyway – if measurable at all.

The same consideration also applies to the selection of climate protection measures within the EU. Here, it is usually argued with the shares that the individual sectors have in CO2 emissions. For example, the building sector is considered a major contributor to German CO2 emissions, with a share of about 30%. However, such shares are economically and ecologically irrelevant. For one thing, the renovation of one sector automatically moves others up in the hierarchy of “main polluters”, since the percentage shares necessarily always add up to 100. In this way, one always finds a new reason for intervention, no matter how much progress has already been made in CO2 reduction overall.

However, it is not the emission shares but the costs of reducing an additional tonne of CO2 that are relevant to the decision. These, in turn, differ greatly from one another. The price of an EU emission certificate is currently just under 90 euros. It reflects the marginal costs of saving one tonne of CO2 in the sectors covered by EU emissions trading (industry, energy, EU aviation). In contrast, four-digit sums have to be spent for the same effect in the buildings sector.[6] This means that the costs here are unnecessarily high for the national economy and thus also impair the ecological effect of climate policy. State subsidy programmes do not change this, because they only distribute the costs differently without costs differently without reducing them for the economy as a whole.

Therefore, binding climate protection targets for individual sectors, regions or plants are misguided. EU emissions trading already automatically ensures that, on the one hand, the CO2 capacity politically specified by the emission rights is adhered to and, on the other hand, that the necessary CO2 reductions take place precisely where the abatement costs are lowest (i.e. lower than the price of a certificate). It is therefore right that the EU also wants to include the transport and buildings sectors, which have not been covered by the system so far, from 2027 onwards. However, this would mean that all regulatory emission reduction requirements would have to be dropped. This is because emissions trading cannot develop its steering function if at the same time the state imposes binding (and in case of doubt uneconomical) detailed requirements on who has to save greenhouse gases where, how much and in what way. There is therefore no both/and here, but only an either/or. Otherwise, the economy and consumers would be wrong twice over, namely with inefficient forced renovations plus climate levies without any steering effect.

On the way to an ecological planned economy

In particular, the paper of the parliamentary group of the Left, but also the EU plan for a “Green Deal”, rely heavily on state guidance of climate-friendly product developments and investment decisions. In a market economy, however, these are the tasks of competing companies. Neither individual entrepreneurs nor government bureaucracies or researchers know which technologies will prove successful and economical in the future. This can only be found out in the competition of ideas, which is why openness to technology and the principle of trial and error should be elementary elements of an efficient climate policy. The de facto exclusion of technologies through prohibition (fossil heating, nuclear power) or intentionally unfulfillable requirements (zero emissions from internal combustion engines) are incompatible with market economy principles, to which the EU has committed itself in several places in its treaties.[7] They are also detrimental to the climate policy goal, since in this way possible innovations in the affected areas are prevented and opportunities are lost for more economical solutions than those preferred by the state.

Also, as a matter of principle, one should never “put all one’s eggs in one basket”. Decentralised investment decisions with corresponding private liability are superior to the state’s specification of “industries of the future”, especially when it comes to long-term decisions about the future. The task of politics is not to steer individual investments, but to create good framework conditions for entrepreneurial decisions. This undoubtedly includes an appropriate infrastructure. There is also nothing to be said against state funding of pilot projects and state financing of basic research since this is usually not profitable in the private sector due to communal effects. An all-encompassing system of public subsidies and aid for endeavours which only what politicians consider having a future, is not a good idea, nor is it economically and ecologically expedient.

Although the EU paper acknowledges technological openness in a footnote, it understands this to mean that the technologies to be promoted from a broad range are ultimately to be defined in a binding manner, while others remain excluded.[8] True technological openness, however, would require the opposite approach: Setting binding CO2 ceilings or prices (ideally through comprehensive emissions trading) with a free choice of means for citizens and companies on how to achieve these goals.

The CDU paper contains much that is correct in this regard but fails to draw the consequence of a clear rejection of the EU approach, which is more of a planned economy than a market economy. This approach also appears legally questionable in many respects. For example, with binding regulations and prohibitions on private energy consumption and the way it is provided, it deeply interferes with citizens’ property rights, which are also guaranteed in the EU Charter of Fundamental Rights. It also violates the principle of proportionality, since there are demonstrably milder and, in particular, more efficient means of saving CO2 than those imposed by the EU. Finally, the question arises as to how far detailed EU regulations are compatible with the principle of subsidiarity, which is also anchored in the EU treaties. In some places, the equal treatment of citizens in the member states is also violated. For example, the energy standards to be met in the building sector are defined relative to what has been achieved so far in the respective country and thus differently depending on the country. As a result, German citizens, who have already done a lot for climate protection, must now bear even higher additional burdens, which also violates the efficiency considerations presented above.

The extensive transfer of funds associated with the “Green Deal” is also economically and legally questionable. The EU wants to distribute almost three quarters of a trillion euros to the 27 member states. The Reconstruction and Resilience Facility (ARF) created for this purpose is the centrepiece of its NextGeneration EU programme, which will start in 2021. No less than €724 billion of the total €807 billion programme is to be spent through the ARF. Of this, 386 billion is earmarked as loans and 338 billion as non-repayable grants. For comparison: the regular EU budget for seven years is in the order of 1,200 billion euros, and the 2023 federal budget has a volume of 476 billion euros. Germany will receive 27.6 billion euros from the ARF, or 7.6%, but will contribute almost a quarter of EU funding. The southern EU countries are served much more generously, as is France, which receives almost 12% of the subsidies. The European Court of Auditors also criticises considerable shortcomings in the precautions against abuse and corruption. In a press release of 8 March 2023, it warns of a “gap in the protection of the EU’s financial interests”. This is because the use of funds is largely left to the discretion of the member states; windfall profits and mere rebooking of projects that were planned anyway are inevitable. The EU is thus moving in the direction of a largely unconditional financial equalisation of countries, which is neither provided for nor permitted by the Treaties. which is neither envisaged nor permitted by the treaties.

Conclusion: Focusing on our own strengths in climate protection

It is true that other countries (USA, Japan, China) have also launched extensive investment and support programmes on the grounds of climate protection. However, the EU should not be tempted to enter into an international subsidy and protection race. Contrary to what is postulated in the EU paper, its comparative strengths do not lie in a one-size-fits-all strategy, but precisely in the opportunity to use the diversity of 27 member countries for a competition of ideas and concepts. The extensive subsidization of climate-friendly projects and the regulatory stipulation of binding CO2 savings targets are also unnecessary or even counterproductive because emissions trading is to be extended to all important sectors in 2027 anyway. This will provide a far more comprehensive, efficient and innovation-promoting instrument for climate protection than could ever be achieved by means of planning. than could ever be achieved by means of a planned economy.

Germany should therefore vehemently oppose the current tendency in the EU to replace federal and competitive structures with an increasingly centralist and interventionist system. It should also be openly communicated to citizens that climate protection ties up resources that are no longer available for other purposes and thus entails losses in material prosperity. It is true that ecological investments also create jobs, but the workers employed there are then no longer available for other production. The ecological transformation is also more capital-intensive than labour-intensive, and at the same time it devalues large stocks of capital that no longer meet the new climate policy requirements. climate policy requirements.

The hope of earning a lot of money in the future as a technology pioneer with corresponding exports has often not been fulfilled. For cost reasons, solar and wind power plants are no longer produced in Europe, but in China or other Far Eastern countries, and a similar development is emerging for other air-conditioning technologies (such as heat pumps).[9] Nor should one place much hope in Keynesian demand effects as a result of government investment programmes. For one thing, they are at best only effective in the short term, and for another, they tend to crowd out other, private-sector investments that would have the same demand effects. Nor can there be any question of the EU countries or the EU itself having done too little deficit spending; rather, the opposite is the case.

Expecting a new “economic miracle” from climate protection programmes is therefore wishful thinking at best, if not misleading the public. Climate protection may be worth the effort required, but it does not come for free, contrary to what these documents suggest. This should be one more reason to think about the above-mentioned alternatives of a completely different, global approach instead of “climate neutrality” of the EU.

*Translated from the original German statement with the kind permission of the author.


[1] Destatis (2023). Europäischer Green Deal: Klimaneutralität bis 2050. URL: https://www.destatis.de/Europa/DE/Thema/GreenDeal/GreenDeal.html

[2] CO2-Online (2020). CO2-Ausstoß weltweit: 10 Länder nach Emissionen. URL: https://www.co2online.de/klima-schuetzen/klimawandel/co2-ausstoss-der-laender/

[3] SVR (2019). Aufbruch zu einer neuen Klimapolitik, Sondergutachten. URL: https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/sg2019/sg_2019.pdf  | Similarly, for example, the world-renowned Swedish meteorologist Bengtsson: Bojanowski A. (2022). „Wissen ist das beste Medikament gegen Klimaangst“. Welt. URL: https://www.welt.de/wissenschaft/plus239362235/Lennart-Bengtsson-Wissen-ist-das-beste-Medikament-gegen-Klimaangst.html?cid=socialmedia.twitter.shared.web

[4] SVR (2019).

[5] Cf. on corresponding ideas e.g. Kornek, U., Edenhofer, O. (2020). The strategic dimension of financing

global public goods, European Economic Review. | van Suntum U. (2021). The Global Protection Organisation

(GPO) – A Proposal to Improve the Handling of Global Challenges., Journal of Applied Economic Studies Issue

72/2021, 207-221; van Suntum (2021). Global climate fund for a more efficient CO2 reduction. MIWI Institute. URL: https://miwiinstitut.de/archives/1325

[6] Total greenhouse gas emissions in Germany in 2022 amounted to 746 million tonnes of CO2 equivalents (https://www.umweltbundesamt.de/daten/klima/treibhausgas-emissionen-indeutschland#emissionsentwicklung).  The building sector causes 30% of this, i.e., around 224 million tonnes. According to the Ministry of Economics, the cost of converting heating systems to at least 65% renewable energy alone will cost 130 billion euros. This alone adds up to 580 euros/tonne of CO2, although this is by no means completely saved. Less optimistic estimates also assume a multiple of the costs mentioned by the Ministry of Economics. To this must be added the costs of the EU regulation on building insulation, which KfW estimates at a total of 254 billion euros for Germany. This means that in the building sector, 1713 euros or 19 times as much as in the industrial sector would have to be spent per tonne of CO2 emitted. emissions would not even be guaranteed.

[7] Particularly worthy of mention here are Art. 3 para. 3 of the Treaty of Lisbon (2009) and Art. 3a of the Maastricht Treaty (1992)

[8] In fn. 4 it says: “The exact product definition has yet to be determined. Based on technology neutrality, the act would build on an assessment of the strategic importance and identified need for investment in the production of different types of climate neutral products. These technologies may go beyond the strategic climate neutral technologies eligible for the specific type of support under the Temporary Crisis Response and Transformation Framework (TCTF) for state aid.”

[9] Magenheim-Hörmann T. (2022). Wie China die deutsche Windindustrie bedroht. RND. URL: https://www.rnd.de/wirtschaft/windkraft-wie-billig-konkurrenz-aus-china-die-deutsche-industrie-bedroht-TXVLPZXE2ZAHFKZSSRJSXDKCMI.html

Leave a Reply

Your email address will not be published. Required fields are marked *