In a recent interview, Robert Habeck was asked whether the war in Ukraine wasn’t the perfect opportunity to advance the energy transition. He had replied that there was nothing positive to be gained from human suffering. I wholeheartedly agree with this formulation, but at the same time I consider myself an optimist (on the verge of idiocy) and as such I hope that society, politics and science are learning a lot at the moment.
Because of the war in Ukraine, we are currently experiencing a gigantic field study on the actual reaction of motorists and households to the sharp rise in petrol and energy prices. To date, there have only been model-based assumptions. I couldn’t find any reliable data on gas and oil consumption in January and February, so I have to rely on my not properly calibrated “Traffic-O-Meter” to estimate how long the commuter and weekend traffic jams are at any given time these days still is. My thesis is: people drive like they always have.
Economically speaking, we are experiencing that energy demand is extremely inelastic, at least in the short term. It is extremely difficult for people to adjust their consumption patterns. This is all the more remarkable as Robert Habeck senses an uncanny “determination and unity” in society to reduce dependence on Russian gas. And yet nothing happens.
To put it bluntly, there are three factions when it comes to the question of how massive savings in the consumption of fossil fuels can be achieved. The first faction relies on commandments, prohibitions and technology specifications. However, we quickly end up with structures similar to a planned economy if politicians want to prescribe in detail who may use how much energy for which application.
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The second faction advocates a real holistic CO2 certificate trade. The state would have the task of determining the initial distribution of consumption rights, organizing a marketplace for households and companies to trade these rights, and also ensuring that nobody consumes more fossil fuels than they have consumption rights available to them. In a previous column I had argued the economic effectiveness of such a solution, but it cannot be implemented in the short term.
The third faction advocates using prices to control consumer behavior by making fossil fuels more expensive. Because of Putin’s war, this faction is experiencing its unwanted baptism of fire with enormously increased prices for gas and oil. A conclusion after three months is certainly a bit early. So far, however, it can be said that even with painful energy prices, the savings are hardly noticeable, at least in the short term. Consumption habits are too rigid.
Marcus Schreiber is a founding partner and chief executive officer at TWS Partners. He has many years of experience in strategic purchasing and broad industry know-how. His focus is on strategic purchasing, applied industrial economics and market design. He also supports companies in applying game theory knowledge in complex procurement decisions.
So what to do if none of these options have a controlling effect, are wanted or available? As an economist, game theorist and “market designer”, I am a passionate supporter of strict fixed rate tenders, in which rights for the use of fossil fuels are distributed among market participants via auction or exchange-like processes.
This solution would have an effect right down to the end consumer and would have two enormous advantages: First, the state would have complete control over how much fossil fuels are actually consumed and thus how much CO2 is emitted in total.
And secondly, a skilful initial distribution of pollution rights within the framework of certificate trading automatically ensures social balance. Rich households have a much higher energy consumption. They have to buy their certificates from poorer households. In this way, socially disadvantaged households in turn receive the means to invest in low-consumption technologies. And people and companies also have maximum freedom as to which energy sources they want to use. However, such a system cannot be introduced overnight.
So if a market solution via volume tenders, based on the second group, cannot be implemented in the short term and we do not want rationing as in a war economy – as demanded by the first group – we cannot do without the control effect of prices. However, as the prices are now, they have almost no effect and are still proving to be social explosives. What to do?
Marcus Schreiber: Energy taxes up, not down
The clumsy cuts in energy taxes that are being discussed in most countries are definitely the wrong solution. What’s to stop oil exporters and energy traders from raising prices to make up for any tax breaks now that they’ve seen consumers paying those high prices. The result would be a subsidy program for Putin, oil states and energy companies.
My suggestion would be a hybrid approach. On the one hand – totally counterintuitive in times of high energy prices – a massive increase in energy taxes, let’s say a doubling. In return, every household with a tax return would have to get part of its energy taxes back through high allowances.
This reimbursement would have to go drastically beyond Christians Linder’s reimbursement proposal, both in terms of amount and complexity. The variables used to calculate the allowances would have to be number of children, distance to work, rural or urban living. If the average household gets an allowance of 50% of the average consumption, it would mean that if the tax rates were doubled and the consumption averaged, they would be treated tax-neutral.
This model would produce several beautiful effects. Firstly, socially disadvantaged households consume less energy on average and are more price-sensitive. They would therefore benefit disproportionately from the concept and be relieved on a net basis. Expected energy savings lead to a drop in demand and this lowers prices for everyone.
Third: Anyone who wants to continue walking around in a silk shirt at home in minus ten degrees or who likes to drive to Kitzbühel every weekend bears a disproportionately high tax burden.
In this model, the state only has a loss of income if we actually save energy, and that’s exactly what it wants to promote. The message of this solution is simple: Dear citizens, earn your tax savings by doing it yourself!
More: Futurist Jeremy Rifkin: ‘This will be the last fossil fuel war’