Berlin Robert Habeck’s (Greens) officials have been working on a formula for months. It is designed to determine how steelmakers, chemical plants and other basic industries are reimbursed by the state for losses when they switch from fossil fuels to more expensive green production.
The formula will be reflected in the planned climate protection agreements that the traffic light agreed in the coalition agreement and which the ministries are currently coordinating. It is to become the heart of the Federal Minister of Economics’ transformation plan.
But there is an alternative to the contracts: green lead markets. The state is not directly driving the conversion of industry. Instead, he ensures that products manufactured in a climate-neutral manner are given preference, be it steel, chemicals, wood or other raw materials. The lead markets can also be found in the coalition agreement, but only sporadically. Habeck is relying more and more on them, but the focus is still on climate protection agreements.
The scientific advisory board at the Federal Ministry of Economics considers this division – central climate protection agreements and selective lead markets – to be in need of improvement. The 37 economists and lawyers express this in a new report that is available to the Handelsblatt. “The Advisory Board recommends that the instrument of green lead markets be given clear priority over climate protection agreements,” it says.
The report, which was created under the leadership of Chairman Klaus Schmidt, is an expression of the change in the venerable Advisory Board. When it comes to climate protection, the experts have so far always referred to the CO2 price as the only sensible instrument.
With the new report, the body, which had existed since 1949, finally parted with this dogma. It shows “that a pure focus on the CO2 price leads to considerable welfare losses,” it says.
Advisory Board Opinion: Controversies like never before
The change is all the more remarkable because the members are appointed for life. Classic order economists such as ex-Ifo boss Hans-Werner Sinn or economics icon Olaf Sievert are still members of the advisory board today.
The authors of the report, including Achim Wambach, President of the Center for European Economic Research (ZEW), are not known for being overly enthusiastic about state intervention.
>>Read here: Habeck is helping the industry with billions in the transformation
From the committee it can be heard that the new report has led to controversy like seldom before. It also contains the unusual reference that the report is partly “controversial”. The report makes him nervous, says one member.
And yet, in the end, the Advisory Board unanimously decided on an expert opinion that contained formulations such as: “Here state support could make an important contribution to ensuring that [klimafreundliche Prozesse] be realized faster than the market would achieve on its own.”
However, the report also shows that the Advisory Board has not fundamentally lost its market-economy compass. Rather, the realization that CO2 pricing alone is not enough leads to pages and pages of explanations as to why all the more competition is needed within state intervention.
New proposal: Green lead markets instead of just climate protection agreements
To this end, the Advisory Board proposes focusing on green lead markets. In the report, this is explained using the example of steel. In the lead market, the manufacturers do not receive any money directly from the state to compensate for the additional costs that arise when producing steel with hydrogen instead of fossil energy. Instead, the state ensures that the demand for green steel is so high that there is no longer any financial disadvantage.
A green lead market can be created in three ways:
- by the state itself specifying the use of green steel in procurement, for example in construction, for trains or bridges;
- by mandating the use of green-produced steel for household appliances or vehicles – depending on the size of a car, green steel would make the car 300 to 700 euros more expensive;
- or by the state granting concessions to producers or buyers if they opt for green steel.
From the point of view of the Advisory Board, the greatest advantage is that the state does not have to know the cost structures of the companies. In the case of Habeck’s climate protection agreements, on the other hand, the calculation formula can be as good as it gets: the state cannot know whether it reflects the exact gap in operating costs between green and fossil steel production.
Only the company knows the details. And that has an incentive to make the gap bigger in order to get more money from the state.
New tradable certificates for green production
In order for a lead market to function, the manufacturers have to prove that they produce green. Because whether produced with hydrogen or fossil energy, the steel looks the same in the end.
Therefore, certificates would have to be introduced, which the company receives after an authority has checked the CO2 neutrality of production. Foreign competitors could also be included in the lead market via the certificates.
Steel production is responsible for 30 percent of the CO2 emissions of German industry.
(Photo: imago images/imagebroker)
So that things don’t get too complicated for companies, the Advisory Board proposes making the certificates tradable. Assuming that the specification in the car market is that 50 percent green steel must be used, this can be problematic for manufacturers. What if you have a permanent supplier, but they’ve only gone green on 20 percent of their steel production? Or if there is not enough green steel available?
Then the companies could simply buy green steel certificates, for example from companies that exceed the requirements. This does not change the amount of green steel produced.
>>Read here: Small and medium-sized companies see themselves at a disadvantage when it comes to climate protection agreements
However, the green lead markets have a problem: They only work in Europe. Setting up a certificate trading system for steel and for all other basic industries would take years. “That’s why green lead markets are not a quick solution to driving the transformation to climate-friendly production,” says the report.
For this reason, the Advisory Board believes it is right to use climate protection agreements. However, the federal government should only do this for a short time and to a very limited extent, in order to then switch to lead market certificate trading. Robert Habeck will probably have looked at the proposal closely: he approved the report a few days ago.
More: Climate protectors and scientists call for CO2 storage in Germany.
First publication: 02/08/23, 04:08.