CBAM will speed up inflation and deindustrialization in Germany

_ Yuri Kofner, Economist, MIWI Institute for Market Integration and Economic Policy. Munich – Graz, 2 September 2023. First published in German with the Austrian Freilich Magazine.

Climate policy and the so-called “green transformation” are leading to deindustrialization and the relocation of domestic production abroad. German companies are relocating their factories to countries where production costs are significantly lower due to low or non-existent CO2 prices, for example to China, the USA and Eastern Europe. In scientific literature, this effect is euphemistically called “carbon leakage”. According to calculations by the Kiel Institute for the World Economy (IfW), this migration of industry forced by climate policy costs the German economy a total of 1.5 per cent of GDP.[1]

The exodus of German industry is real. An analysis by the IW Cologne shows that the negative balance of foreign direct investment has reached a new record of minus 125 billion euros in 2022. This means: German companies have invested significantly more abroad than foreign companies have invested in the Federal Republic. Germany is simply no longer attractive for companies and banks. Between 2013 and 2022, net capital outflows from the German economy add up to a total of over 605 billion euros.[2]

Deindustrialization is particularly critical in the energy-intensive sectors of chemicals, steel, paper, cement, glass, ceramics and non-ferrous metals. According to calculations by the same research institute, their capital stock shrank by more than ten percent between 2010 and 2017 (latest available data).[3] The reason: existing production facilities are slowly being written off, but no new ones are being built. At least not in Germany.

But instead of stopping the exodus of German industry by simply abandoning the nonsensical concept of CO2 pricing, as demanded by the AfD, the politicians of the cartel parties (including the CDU/CSU, FDP, FW) in Berlin and Brussels are relying on the socialist intervention spiral: they want to follow up the state failure of the anti-economic climate policy with another state failure and slow down the exodus of German industry with a CO2-dependent import tariff. This “Carbon Border Adjustment Mechanism”, CBAM for short, will be introduced in the EU as early as October this year and is to be fully implemented by 2026.[4]

This climate tariff will initially be levied on the following goods: Aluminium, iron and steel, fertilizer, electricity, cement and hydrogen. Economist André Wolf of the cep estimates that CBAM will increase import costs by one per cent for steel, 1.4 per cent for aluminium, nearly two per cent for fertilizer and 3.7 per cent for cement.[5]

But it is not only imports that will become more expensive. German exports to markets outside the EU will also become relatively less competitive in price due to the climate tariff. Even calculations by the Federal Environment Agency (headed by the infamous Verena Graichen!) show: German aluminium will become five percent more expensive on foreign markets, steel and iron products four to 16 percent, fertilizers 31 to 45 percent and cement 35 to 76 percent.[6]

Currently, the German economy is in recession with a 0.3 per cent decline in GDP in the first quarter of 2023. A model calculation by the DIW shows that the CBAM will reduce real incomes in Germany by a further one per cent. Converted, this makes the average German household just under 1,000 euros poorer.[7]

Sources

[1] Böhringer C., Peterson S. et al. (2021). Climate Policies after Paris: Pledge, Trade, and Recycle. IfW Kiel. URL: https://www.ifw-kiel.de/publications/climate-policies-after-paris-pledge-trade-and-recycle-insights-from-the-36th-energy-modeling-forum-study-emf36-21068/

[2] Rusche C. (2023). Deindustrialisierung. Eine Analyse auf Basis von Direktinvestitionen, IW Köln. URL: https://www.iwkoeln.de/presse/pressemitteilungen/christian-rusche-geldabfluesse-in-deutschland-so-hoch-wie-nie.html

[3] Bardt H. (2020). Abbau im Aufschwung: Energieintensive Branchen reduzieren ihren Kapitalstock. IW Köln. URL: https://www.iwkoeln.de/studien/hubertus-bardt-energieintensive-branchen-reduzieren-ihren-kapitalstock-471553.html

[4] Prieske M., Stiebritz M. (2023). EU CO2-Grenzausgleich ab 1. Oktober 2023 in Kraft. IHK Gera. URL: https://www.ihk.de/gera/zoll-aussenwirtschaft/import-channel/bestimmungen-channel/import-co2-grenzausgleich-5772604

[5] Wolf A. (2022). Auswirkungen eines CO²-Grenzausgleichs auf nachgelagerte Industrien. CEP. URL: https://www.wirtschaftsdienst.eu/inhalt/jahr/2022/heft/9/beitrag/auswirkungen-eines-co2-grenzausgleichs-auf-nachgelagerte-industrien.html

[6] Graichen V. et al. (2022). CO₂-Grenzausgleich in der EU (CBAM): Bedeutung von Außenhandel und CO₂-Kosten. Umweltbundesamt. URL: https://www.umweltbundesamt.de/en/publikationen/co2-grenzausgleich-in-der-eu-cbam-bedeutung-von

[7] Sogalla R. (2023). Neuer europäischer Mechanismus für CO2-Grenzausgleich. DIW. URL: https://www.diw.de/de/diw_01.c.873736.de/publikationen/wochenberichte/2023_22_1/neuer_europaeischer_mechanismus_fuer_co2-grenzausgleich.html