Lots of money, little energy

The federal government wants to overcome the gas and electricity crisis with a defense shield of 200 billion euros. State transfers are intended to ensure the growth and competitiveness of the German economy. Berlin is thus following the European trend of wanting to solve the energy crisis with lots of money for price caps or brakes.

France, for example, has been stopping the gas price since October 2021 and limiting the rise in electricity prices – accordingly, the demand for gas and electricity is higher than would be the case with market prices. The state pays the difference with new debt. In line with this, the European fiscal rules are suspended. According to the wishes of Paris and Rome, they should be relaxed further before the rules could take effect again in 2024.

In Spain, gas used to produce electricity was subsidized in order to lower the price of electricity. The result: increased gas consumption and additional electricity exports to France and Portugal. The costs are passed on to cheaper sources such as renewable energies.

Germany is trying to find a middle way. Households, small and medium-sized businesses receive lump sum payments. The incentive to save gas should be retained. For larger industrial companies, the gas price for 70 percent of consumption should be capped at seven cents per kilowatt hour. That would cap the incentive to save if no resale of saved gas quantities is allowed.

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Price caps and protective shields go far beyond needy private households and endangered companies. They are designed to help practically everyone. This is politically understandable – fear of new yellow vest protests is rampant in Europe’s governments.

But the energy crisis will not be solved in this way. Instead, there is only a redistribution of costs that fuels inflation. Many recipients of the payments do not necessarily need them. In the future, however, the additional government debt will have to be financed through higher taxes, lower government spending and inflation-related devaluation of the liabilities.

Start building the bridge

Capped gas and electricity prices can reduce the contribution of energy prices to consumer price inflation. But even in France inflation has increased significantly recently, in Spain it was already in double digits in June and thus much earlier than in Germany.

Global Challenges – idea and regular authors

Inflation leads to higher tax burdens for households and companies. This is due to the progressive tax rate. A further increase in taxes, as recently proposed by the German Council of Economic Experts, reduces performance incentives, weakens the competitiveness of German companies and dampens economic growth on the supply side.

What we really need is more energy. Germany’s special path to climate neutrality in 2045 was built on Russian gas.

It is now necessary to build a new bridge that will enable the Federal Republic to free itself from greenhouse gas emissions by 2045 and at the same time remain a leading industrial nation with growing prosperity. Unfortunately, instead of tackling the bridge construction, politicians content themselves with filling gas storage tanks and extending the life of three nuclear power plants by three and a half months.

A rapid, massive and increasingly climate-friendly expansion of the energy supply would be necessary. That would lower energy prices again.

A pragmatic approach would first have to include an expansion of coal-fired power generation over several years, even if that is not good for the climate.

Secondly, in the interest of the climate, the six available nuclear power plants in Germany should continue to be used for at least ten years. Many countries therefore rely on nuclear power.

Thirdly, this also applies to the use of natural gas as long as the problem of storing solar and wind power remains unsolved.

Reductions in some environmental goals

Fourth, the rapid expansion of renewable energies and their infrastructure requires compromises in other environmental goals, whether it concerns the Wadden Sea or the forest.

Fifth, our shale gas deposits could replace a good part of the Russian gas supplies originally planned until 2045. In any case, fracking in Germany would be more climate-friendly than importing expensive liquefied fracking gas – and would also help to lower the gas price.

However, if the political maxim “transfers instead of energy” remains, energy-intensive industrial production will migrate from Germany to other regions, such as North America. Pipeline gas is still available there at a fraction of the price here. The competitiveness of Germany as a business location is suffering.

However, emigration does not help the climate and environment, especially when environmental standards are more relaxed elsewhere. German industrial production is already seven percent below the level at the beginning of 2018. In the USA it rose by five percent in the same period. That should be a warning to us.
The author:
Volker Wieland is Executive Director of the Institute for Monetary and Financial Stability at the Goethe University in Frankfurt.
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