The failure of Germany’s green energy policies

You can’t have your cake and eat it too – even when it comes to energy. Germany has been a champion of the ‘green economy’ for the past decade, but now the time has come to pay the bill. And the country seems a very long way from capturing the supposed ‘double dividend’ – environmental sustainability and economic growth – that promoters of Energiewende (Berlin’s ‘energy revolution’) promised.

As the Wall Street Journal’s Matthew Karnitschnig reports, the cost of energy to German businesses has risen by 60 per cent in just five years, driven by subsidies and other costs (such as the financing of new infrastructure and addressing problems with system imbalances). The largest energy-intensive businesses are not yet feeling the pain, because they are granted an exemption from such surcharges, but even this may come to an end if the EU Commission rules that it represents unfair state aid. And if this doesn’t happen, small and medium enterprises will continue to bear a disproportionate share of the costs, becoming less and less competitive.

Even Angela Merkel, a strong proponent of Energiewende, has admitted it is not working as planned. Therefore a reform was passed in June, under which subsidies for new installations are capped and a new tax on self-consumption is introduced to achieve a fairer distribution of the renewable levies. But this is no solution: at best it will prevent the problem from getting even worse.

Now Germany is realising that far from solving the environmental problem (Germany is still one of the biggest CO2 emitters in Europe), the fast growth of subsidised renewables raises at least three major issues. The first one is of course the most pressing: German’s economic competitiveness can be severely harmed by high energy prices. It would be unfair to claim that the recent downturn was caused by them, but it is self-evident that, all else being equal, lower energy prices would have helped mitigate it. Secondly, in order to protect the most powerful groups (such as energy-intensive industries and the renewable lobby) the cost burden is focused on smaller businesses. This may work up to a point, but then it becomes a social, economic, and political problem. Finally, the country will have to deal with the ‘vested rights’ issue sooner or later: how do you draw the line between the ‘right’ of subsidy recipients to keep getting incentives and the ‘duty’ of taxpayers and energy consumers to finance foolish spending even at the cost of shutting down their own activities or giving up a significant share of their income?

The German experience with Energiewende is an instructive parable of where an energy policy based upon political favours and central planning ends up. Hopefully other EU countries will learn the lessons before it’s too late.

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As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

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