The Green Thunderstorm

The Federal Republic of Germany wants to set a good example in climate policy, but is not making any significant contribution to cooling the earth with its economic self-sacrifice. An essay on right and wrong climate policy.

I find that many arguments from Hans-Werner Sinn have not been discussed properly, yet. Therefore, I translated his article:

Frankfurter Allgemeine Zeitung, 10 January 2020, p. 16; republished at http://www.focus.de as “Beim Klimaschutz ist Deutschland auf dem Irrweg – 6 Maßnahmen helfen der Erde wirklich”, 3 February 2020.

Germany is very serious about climate policy. While the EU as a whole has committed itself to reducing CO2 emissions by 40 percent by 2030 compared to 1990 levels, Germany even wants to cut them by 55 percent and is prepared to pay fines to the EU if it fails to do so.

But will this economic self-torture actually produce the desired effects? One can doubt that. This article lists some of the most important technical and economic inconsistencies of the energy system transformation and argues for a prudent course correction with regard to international aspects of the event.

Let us start with the Renewable Energy Sources Act (EEG), the heart of German climate policy. The EEG gives producers of green electricity the right to sell electricity to grid operators at politically fixed prices. Depending on the calculation, the EEG costs citizens between 20 and 25 billion euros annually. It has now given Germany the highest electricity costs in Europe, if not in the entire industrialised world. This has already resulted in painful relocations in the area of aluminium production and wafer manufacturing. Others will follow.

Long-term storage of electricity

The Green party had previously argued that the EEG would create a solar industry in Germany that could sell its products to the world. Today they praise the EEG because it did so in China. Unfortunately, the EEG has no independent influence whatsoever on the pan-European CO2 emissions of power plants, because these are already regulated by the European emissions trading scheme. It has led to an oversupply of emission certificates with much too low prices, which has partially spared other countries the greening of their energy structure.

Technically, too, the replacement of fossil electricity by wind and solar power, which is being pushed by the EEG, will soon reach its limits, because this electricity flows very irregularly, namely only when nature wants it and not when electricity customers need it. The temporal divergences have to be bridged somehow. If you wanted to try this with storage facilities, you would already need a capacity of more than 11 TWh, which is three hundred times the capacity of the German pumped storage plants. The storage facilities would be full in September. They would be empty in March because a lot of electricity is consumed in winter and little solar power is supplied.

Batteries do not offer an alternative to solve the seasonal storage problem because they are “not affordable” even if costs are drastically reduced, according to a study by Leopoldina, Acatech and the Union of German Academies of Sciences and Humanities. Only hydrogen can be considered as an alternative storage medium. Unfortunately, however, at least two thirds of the energy is lost in the loop from electricity via the generation, compression and transport of the hydrogen back to electricity. This path is not yet economical either.

Because the long-term storage of electricity is so difficult, Germany buffers the difference between electricity demand and the production of wind and solar power not with storage facilities, but with conventional power plants that are run up and down in the opposite direction to wind and solar power. At their current level, they are permanently necessary complements of weather-dependent electricity, no matter how much wind and solar power is installed.

The storage question arises anew

However, this solution reaches its limits when the green production peaks exceed the electricity demand for larger shares of wind and solar power. The excess peaks can no longer be buffered by shutting down conventional plants. The critical market share of wind and solar power, where the first peaks will exceed demand, is around 30 percent. Germany will arrive there very soon. Then the question of storage will arise anew.

The German grid is already having difficulty coping with the green production peaks. Last year, for example, there were 232 hours with negative electricity prices because of them. The network operators paid for the surplus electricity to be disposed of. On Whit Saturday 2019 alone, they spent 40 million euros on this. In addition, the operators of green and conventional power plants were paid alternately for delivery stops that were imposed on them. In the first quarter of 2019 alone (the most recent for which data is available), electricity customers had to spend €364 million on this.

An interconnected grid from the Alps to Norway would alleviate the problem somewhat, as it would help to distribute electricity peaks between countries and, above all, build new pumped-storage power plants. The EU praises the extensive construction of pumped-storage power plants as the “New Era of Smarter Energy Management”. A cross-national geological study (eStorage) commissioned by the EU shows that pumped-storage power plants with a capacity of 1.6 TWh could be built in an interconnected grid from Switzerland and Austria via Germany and Denmark to Norway, which means an eightfold increase in the current storage capacity of these countries.

If one buffers as much as possible in all the countries mentioned above by means of conventional plants (including dam power plants and biogas plants) and uses the pumped storage facilities only for the excess electricity peaks, the sum of these countries would result in a share of wind and solar electricity of almost 50 percent, which can be used without losses. Higher market shares are possible, but then progressively growing shares of the available wind and solar power must be dumped or denatured to heat, or they are largely lost in the loop over the hydrogen economy.

The true masters of the climate

A second question mark is placed on the e-cars. Various studies, including one by VW, concluded last year that in the German energy mix, an e-car is more likely to emit more CO2 than a diesel car because the “CO2 backpack” that was filled during battery production in China weighs so heavily that it dominates the slightly lower emissions during operation. According to the most recently published study by the Austrian institute Joanneum Research, which was commissioned by the ADAC and the Austrian Automobile Club, you have to drive at least 219,000 kilometres before an electric car in the Golf class beats a corresponding car with a diesel engine in terms of its CO2 emissions. However, the average life expectancy of a car in Germany is only about 180,000 kilometres.

Another error in reasoning lies in the much-tried waste bin analogy: Yes, Germany’s emissions are low, at only 2 percent of global emissions. But even if one had to fear that the Americans, Australians and Brazilians would not follow Germany, it was ethically imperative not to blow any more CO2 into the atmosphere. Ordinary people also use the dustbin when others throw their rubbish on the street. Their own contribution is small, but not zero.

Unfortunately, the analogy is wrong, because the trash can for CO2 is currently still missing. The reduction of European emissions by technical means is therefore not the same as waste prevention, as many people think. Rather, it implies that Europeans buy less fossil fuel, that the prices of this fuel on the world markets fall, and that other countries buy at least a proportion of the quantities released in Europe at falling prices and burn them themselves. How large this share is depends on how resource owners react to falling world market prices. It is they, namely the sheikhs, the coal barons and Putin’s gas oligarchs, and not European consumers and their green politicians, who are proving to be the masters of the climate.

Three hypotheses rival

Three hypotheses for the behaviour of resource providers compete with each other. The first hopes that suppliers will extract less when prices fall because it is no longer worthwhile to extract some marginal deposits. If the extraction volume falls, climate change slows down.

But be careful: Scarcity prices arise for depletable natural resources, which are far higher than the extraction costs, even for marginal deposits, and justify licence fees or capital costs for the acquisition of the deposits. The royalties and capital costs are not cost elements relevant to the extraction process, because they would also decrease with the devaluation of the deposits, which would result from falling oil prices. Last year, the world market price for crude oil averaged 62 dollars per barrel (159 litres), but in the Gulf, extracting a barrel costs only a handful of dollars. Even from Canada’s tar sands, oil can be extracted for a fraction of the market price.

It is questionable whether Germany or the EU could manage on their own to push world market prices below extraction costs by means of their own demand restraint. If they do not succeed, i.e. the resource owners do not react and continue mining unchanged despite the price cuts, then it follows that other consumer countries will necessarily consume as much additional carbon as Europe releases. Nothing would be gained for the climate.

The second hypothesis assumes that resource owners think in the short term and need money to finance their farms. At falling prices they even extract more to compensate for the loss of revenue. Then, unfortunately, European reticence in the demand for fossil fuels leads to even more carbon being extracted and emitted as CO2.

Into the adventure on moral considerations
The third hypothesis assumes that resource owners think long-term and seek advice from clever portfolio managers. They view the greening of the energy world with great concern and try to anticipate the anticipated destruction of their markets by reducing their resources faster. CO2 emissions are rising and climate change is accelerating. I once called this hypothesis the “Green Paradox”.

There are now numerous indications of the Green Paradox. First of all, there is the decades-long stagnation of real prices for fossil fuels. All fossil fuels are cheaper today than they were forty years ago in comparison to the goods produced. This could be due to the fact that resource owners have become increasingly afraid of the green movements and have continuously increased their extraction, even though their stocks have been decreasing. Even the Norwegians have tried to bring in their harvest before the “green storm” by turning their fossil resources into a well-diversified state asset fund as quickly as possible.

In America, the fear of the imminent destruction of the market could explain why shale oil production was started there very quickly a few years ago and surprisingly for the world. And finally, German lignite producers probably thought along similar lines. How else can one explain that Germany is the world champion in terms of annual extraction quantities, but has only negligible stocks in the ground in international comparison? Vattenfall and the others will have feared that the green movement in Germany could reach its goal earlier than elsewhere. So they had to hurry.

It remains to be seen which of the three hypotheses is empirically dominant. In any case, a look at the supply side of the resource market shows where the deficits of European climate policy lie and how weak its economic rationale is. Germany is embarking on an adventure based on moral considerations without the public discourse having even considered the evasive reactions of the world markets and the channels of action of a supply-oriented climate policy. Even some natural scientists seem to find it difficult to think in these categories.

Correcting the mistakes

What can be done to correct the inconsistencies and errors? My (incomplete) list of technical and economic possibilities covers these points:

Firstly, Germany could reverse its nuclear phase-out, build new power plants with a lower hazard potential and resume its research on fuel rod reprocessing. In parallel, research on the stellerator at the MPG nuclear fusion plant in Greifswald could be intensified. Sweden, the first country to advocate nuclear phase-out after the Harrisburg accident in 1979, has in fact never backed out and decided in 2016 to keep all its ten reactors permanently in operation and to repair them or build new ones if necessary. Japan, too, is once again fully involved. It is not true that this form of energy is more expensive than wind or solar power, as is often claimed. If the non-regulated green electricity were to be deprived of the feed-in privilege and its producers forced to pay for the indispensable support provided by conventional plants, everyone would immediately realize how cheap nuclear power is.

Secondly, Germany could participate in a United Nations programme to save the rainforests. The United Nations could buy or lease the rainforests in order to protect them permanently. That would probably not even be too expensive. If the existing offers by environmentalists could be scaled up, the purchase price for the entire Amazon rainforest would be 275 billion euros. Germany alone could raise this sum if it waived the EEG for a decade and a half.

Thirdly, one could start injecting the CO2 into underground caverns and depleted natural gas fields. That would then be the trash can necessary for the German moral position. This way should bring relief for several decades.

Difficult but necessary

Fourthly, Germany could work towards international agreements that remove the incentive for resource owners to extract and sell their resources in order to turn them into financial assets. In addition to the political pacification of the respective regions, a worldwide transition from residence taxation to source country taxation of capital gains would subject the hitherto untaxed income of the oil sheikhs and other resource owners to taxation and reduce the climate-damaging incentive to convert fossil stockpiles into financial assets. This would also dry up the tax havens against which the OECD wants to take action anyway.

Fifthly, and most importantly, Germany could work towards the establishment of a global emissions trading scheme covering all sectors of the economy and all countries. If such a trade were established almost completely under the aegis of the United Nations, it could set a global cap and thus effectively limit the world’s CO2 emissions. The globally uniform price for CO2 that would result from the trade would efficiently coordinate the avoidance efforts of all companies and people. Distributional considerations between countries can be taken into account in such a system by allocating an initial supply of certificates, without having to make concessions in the fight against climate change.

Sixthly, one could follow the proposal of Nobel laureate William Nordhaus and establish a “club of the willing”, which operates a comprehensive emissions trading system, discriminates against non-members in trading and is sufficiently large and economically attractive to have a pull effect on new members.

The author has no illusions about how difficult it is to implement these proposals. But those who reject them will have to accept climate change, and please do not claim that the mere self-torture with unilateral environmental regulations, as Germany is doing, will at least make a small contribution to cooling the earth.

The text summarizes the author’s Christmas Lecture 2019 at the LMU Munich. It is available as video https://youtu.be/DKc7vwt-5Ho