_ Yuri Kofner, economist, MIWI Institute. Munich, 25 June 2023.
Whether Bayer, Hoechst or BASF, Germany’s largest and best-known chemical companies were founded in the Wilhelminian Empire – a time when the national tax quota was 8 percent, the legal framework was very liberal and education was world-leading.[1] Just over a hundred years later, however, the state-imposed “green transformation” is leading to accelerated deindustrialization and the exodus of German chemical and pharmaceutical companies, especially to China and the USA. Only a return to a liberal economic policy can stop and reverse this process.
Importance of the chemical industry for the German economy
The chemical industry is of fundamental importance for the future of the German economy as an innovative industrial nation.
The chemical-pharmaceutical industry is the third-largest industrial sector after automotive and mechanical engineering. With a direct gross value added of 33 billion euros and a total gross value added of 70 billion euros, it accounts for 3.6 per cent of manufacturing and 2.3 per cent of the national gross value added.[2]
This may not seem like much, but one has to consider that chemical products are the material basis for any modern economy. Two thirds of the chemicals produced in Germany are further processed by the domestic industry. The value added multiplier of the chemical industry is 2.08, which means that every euro earned in the industry generates 1.08 euros in indirect and induced value added.
The domestic chemical and pharmaceutical sector is an important and attractive employer: it directly employs almost half a million people[3] and creates jobs for 1.7 million citizens in total. Thus, it has an employment multiplier of 3.6. Under-30 skilled workers in this sector earn a median monthly gross of over 4,000 euros,[4] experts and middle managers earn between 7,200 and 10,400 euros gross.[5]
The sector is dominated by medium-sized companies, as 92 percent of German chemical companies are small and medium-sized enterprises with fewer than 500 employees.
With expenditure on research and development of over 12.5 billion euros, the chemical-pharmaceutical industry ranks third after the automotive and electrical industries.[6] In 2021, the innovation intensity of the German chemical industry was around 4.5 per cent, according to a survey by the ZEW.[7]
Green transformation means deindustrialization
Since 2012, the annual domestic investments of German chemical and pharmaceutical companies have been on average 14 percent lower than their outward FDI.[8] As a result, value creation is successively migrating to other countries, while production in Germany continues at best with the existing plants. The chemical industry has been investing below depreciation for many years and thus has been reducing its capital stock within the country. The capital stock has fallen by more than 10 per cent since Angela Merkel (CDU) took office.
Since the end of 2021, the chemical industry’s production index has slumped by 20 per cent.[9] The ifo business climate index for the chemical industry has fallen from almost 40 points at the beginning of 2021 to -26 points in January 2023.[10]
Almost all the blame for the escalating exodus of the German chemical industry lies with state measures that the German government is implementing or causing in pursuit of the so-called “green transformation”: the energy turnaround, escalating bureaucracy and tax burdens, the shortage of skilled workers, its climate and sanctions policies. A study by the BAVC estimates that at least 60,000 jobs will be lost in the domestic chemical industry by 2030 as a result of the green transformation.[11]
Electricity
Due to the energy turnaround, the price of electricity for large industrial customers in Germany has risen by almost half in the past decade, from 8.3 cents per kWh in 2010 to 12.5 cents per kWh in 2021, i.e. even before the Ukraine war.[12] For several years now, Germany has had the highest electricity prices for corporate customers in the world. In the USA these are five times lower, in China 8.5 times.[13]
Apart from the cost disadvantage already caused, the green transformation would also lead to an illusory increase in electricity demand: In 2021, the chemical and pharmaceutical sector consumed 53 TWh, or about 10.6 percent of Germany’s electricity consumption.[14] According to studies by the VCI, achieving “climate neutrality” would force the chemical and pharmaceutical sector to increase its electricity consumption twelvefold to 628 TWh from the mid-2030s until 2050. That would be 10 percent more than Germany’s entire current electricity consumption…[15]
Natural gas and hydrogen
Between 2018 and April 2021, the wholesale price of natural gas in Europe (16 euros per MWh) was on average twice as high as in the United States (8 euros per MWh), but only half as high as in Japan (29 euros per MWh). However, after the outbreak of the war in Ukraine, the wholesale price of natural gas in Europe (119 euros per MWh) became on average six times higher than in the United States (19 euros per MWh) and twice higher than in Japan (61 euros per MWh).[16]
As part of the “green transformation”, the chemical industry is being pushed to switch from natural gas to “green” hydrogen, i.e. hydrogen produced with renewable energy. However, this plan is seriously flawed. Currently, domestic H2 production capacities are completely inadequate. In 2020, Germany produced 60 TWh of hydrogen, but only 3 TWh (5 per cent) of this was “green”.[17] By 2050, the chemical industry’s “green” hydrogen demand is estimated to be between 80 and 283 TWh, depending on the scenario.[18] H2 is also very expensive: in 2019, green hydrogen cost between 165 and up to 500 euros per MWh and grey hydrogen 45 euros per MWh. The additional transport costs for imported H2 are currently 20 euros per MWh. By 2050, the price of green H2 is expected to decrease, but still remain at 90 euros per MWh.[19] By comparison, the price of natural gas in Europe is expected to be 54 euros per MWh in 2024.
Carbon pricing
CO2 pricing in the EU continues to significantly increase production costs for the German chemical industry. Between 2013 and May 2023, the average allowance price in the EU ETS increased twenty-fold from 4.6 euros per tonne of CO2 to almost 90 euros per tonne of CO2.[20] Meanwhile, neither the United States nor China have carbon pricing in the industrial sector.
The domestic chemical industry will be immensely burdened in various ways by the EU’s Carbon Border Adjustment Mechanism (CBAM) planned for 2026. It is estimated that this carbon tariff will increase import costs for ammonia, nitric acid and (nitrogen) fertilizers by almost 2 per cent.[21] Overall, the CBAM will lead to a real income loss for the German economy of 1 percent.[22] Since the CBAM does not subsidize exports, the domestic chemical industry will also be less price competitive on foreign markets. For example, the export price for German ammonia will rise by 45 percent.[23] Last but not least, economists fear that the introduction of the CBAM will lead to retaliatory measures by the affected foreign trading partners.[24] For example, BASF has closed its ammonia production facilities in Wilhelmshaven due to the extreme increase in gas prices, but also in knowledge of the planned CBAM, and has announced that it will instead invest more in production facilities in China. [25]
Supply Chain Act
The National Supply Chain Act (LkSG) is another bureaucratic monster imposed on the chemical industry. According to a representative survey, almost a quarter (23.8 percent) of the chemical industry is directly affected by the new law. De facto, however, all companies will be affected, especially SMEs. 83 per cent of the companies surveyed argue that the Supply Chain Act will add bureaucratic burdens and worsen their international competitiveness.[26]
According to the VCI, the additional bureaucratic burden will cost each SME around 30,000 euros per year and each large company around 260,000 euros per year. Based on structural surveys of Destatis, it can be estimated that the LkSG will cost the German chemical and pharmaceutical industry between 0.1 and 0.2 billion euros per year. Worse still, it is expected that some of the companies will move completely out of the affected countries, making place for Chinese and US competitors.
Ban on fluoropolymers
Unfortunately, the worst is yet to come. Under the REACH amendment, the EU will de facto ban the production and use of fluoropolymers, fluorinated gases and PFAS (per- and polyfluorinated chemicals). This would mean the end not only of the German chemical and pharmaceutical industry, but of the entire manufacturing sector, and, indeed, of our modern economy as we know it. After all, over 95 percent of all industrial products require precursors from the chemical industry. Fluoropolymers in particular, due to their special properties, are indispensable for almost all high technologies, for example: for semiconductors in microelectronics, for anodes and cathodes in fuel cells and car batteries, for solar panels, rotor blades and heat pumps, for heat-resistant insulation in aerospace, for 5G antennas, for technical protective clothing and so on and so forth…
In most applications there are no cost-effective or even technical substitutes for the use of fluoropolymers, with only a few exceptions, e.g. propane instead of F-gases in heat pumps.
It is intolerable that the REACH amendment abandons the traditional and internationally established science-based risk assessment approach of chemical substances in favour of a crude hazard assessment, according to which only the substance property is decisive without assessment of the actual exposure risk.
Even worse is the fact that all fluoropolymers are thrown into the same assessment group, even though they have completely different properties depending on the specific compound.
Even more, most fluoropolymers are absolutely harmless to humans and nature. They are only regulated because of their persistence. Moreover, fluorpolymers can be effectively recycled or destroyed by thermal treatment.
Alternative relief programme for the chemical industry
In order to save the German chemical industry and make the German production location attractive for investment again, a fundamentally alternative and comprehensive relief package is necessary. This should tackle the above-mentioned state-induced problems at the root and include the following measures:
Electricity
In order to become competitive again despite the “green transformation”, the chemical industry is demanding a so-called “transformation” or “bridge” electricity price of 60 euros per MWh from the state. However, this state intervention in the electricity market is a costly, competition-killing and overall harmful subsidy.[27]
A much more free-market approach would be to expand base-load capable and regulable energy supply and to reduce taxes and levies on energy sources. A 90 per cent reduction in electricity tax, withdrawal from EU emissions trading and the theoretical restart of Germany’s last six nuclear power plants would reduce the price of electricity for all domestic companies, not just big industry, to 88 euros per MWh. These three measures alone would make the price of electricity for production as competitive as in China again.
Natural gas as a source of energy and materials for the chemical industry must be made affordable and abundantly available again. A switch to hydrogen must remain entirely voluntary and be based solely on economic and technical considerations of each individual chemical company.
Any sanctions against the import of Russian precursors for the domestic chemical industry must be lifted. Repairing and commissioning Nord Stream 2 would supply up to 225 TWh of natural gas to the German economy at a price of between 27 and 36 euros per MWh.[28] In addition, the energy tax on natural gas for companies must be reduced from the current “reduced” rate of 1.38 euros per MWh to the EU minimum rate of 0.54 euros per MWh.[29]
To become potentially economically viable, the production and use of hydrogen must be based on a technology-open approach that allows for “grey” and “red” hydrogen, i.e. through steam reforming of hydrocarbons (50 euros per MWh) and with the help of nuclear power (65 euros per MWh).[30]
Carbon pricing
The CO2 pricing of the chemical industry must be lifted immediately, which includes the exit from the European Emissions Trading Scheme, the abolition of the national CO2 levy and the abolition of the CO2 border adjustment mechanism.
On the one hand, chemical products are of great importance for carbon reduction. Every tonne of CO2 emitted in the production of chemical products saves three tonnes elsewhere.[31]
Secondly, national and European CO2 pricing only leads to the relocation of German chemical production to China and the United States (euphemistically called “carbon leakage”), which, despite “green” rhetoric for the public, do not even think of imposing CO2 pricing on their own industries. Contrary to the official protestations of the European Commission and financially dependent research institutes, the CBAM will not slow down this process, but accelerate it.
If reducing CO2 emissions remains a political goal in the near future, much more cost-effective mitigation measures would be the creation of an international climate fund,[32] financial support for natural capture and storage (CCS), e.g. reforestation, and artificial carbon capture and utilisation (CCU). The latter, however, would still be very costly at 52 to 160 euros per tonne of CO2.[33] A recent OECD meta-study shows that reforestation is one of the most cost-effective options for CO2 mitigation, with costs ranging from 4 to 23 euros per tonne of CO2.[34]
Securing skilled labour
The shortage of skilled labour, which is severely affecting the manufacturing sector, was mentioned only in passing. Countermeasures should include above all an education offensive and a return migration programme for emigrated Germans, three quarters of whom are highly qualified skilled workers of prime working age. A detailed alternative concept for securing skilled labour is outlined in a forthcoming study by the author.[35]
Bureaucracy and taxes
The bureaucratic burden on the chemical industry must be drastically reduced, among other things by abolishing the Supply Chain Act, the Whistleblower Protection Act, the Sustainability Reporting Directive (CSRD) and by defusing the Verification Act. Of course, the de facto ban on fluoropolymers through the REACH recast must be avoided at all costs. Instead, incentives for a circular economy should be promoted.
Property tax must be abolished and the corporate tax rate (combined corporate and trade tax) reduced to 15 per cent.[36] The basic personal income tax allowance must be increased from 10,908 to 24,000 euros per year.
…
The exemption programme outlined would bring considerable financial relief to the domestic chemical industry. For example, the above-mentioned reduction of electricity and gas prices for industrial customers as well as the reduction of the combined corporate tax rate would relieve the chemical and pharmaceutical industry by about 9.6 billion euros per year. This would correspond to an average relief of 2.2 million euros for each chemical and pharmaceutical company in Germany.
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