The recommended gas price brake wastes public funds

BASF factory

The Ludwigshafen company would benefit greatly from the gas price brake.

(Photo: AP)

The expert commission for gas and heat presented its final report last week with a recommendation for the structure of the gas price brake. The proposal for industrial consumers includes a government gift worth billions to corporations like BASF, which will not help workers in Germany.

The Commission’s recommendation provides for a fixed quota of natural gass for the larger industrial companies, which can be purchased at a reduced price of seven cents per kilowatt hour. The companies can either use the subsidized natural gas for their own consumption or resell it.

How will BASF react to this offer? The company will likely sell the subsidized natural gas in the market at a higher price and book the difference as profit without changing its production decisions. As planned, production in Ludwigshafen will continue to be shut down and ramped up in the US facilities. So this state subsidy is good for the BASF shareholders, but does nothing for the BASF employees.

It could also be that the chemical company uses the subsidized natural gas for production in Germany. However, in a recent study I show that in this case BASF would buy correspondingly less gas for its own production on the market. In other words: BASF’s production and employment decisions are not significantly influenced by the recommended gas price brake.

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Now some economists say that many energy-intensive industrial companies need help in this crisis and that the Commission’s proposal is therefore correct. It’s true: numerous industrial companies are dependent on state support in the current situation. But BASF is not one of them. The proposed gas price brake thus distributes public funds with the watering can and is therefore inefficient from a fiscal point of view.

The author

Tom Krebs is Professor of Macroeconomics at the University of Mannheim.

(Photo: Alex Kraus/Kapix)

The Commission’s proposal is also defended with the argument that it allows price signals to take effect and therefore maximizes the incentive to substitute natural gas with alternative energy sources. This argument is correct, but it falls short. Because there is an alternative solution that relies equally heavily on price signals, but uses public funds more sparingly: crisis-related economic aid is only available in the industrial sector for companies that have suffered a sharp drop in sales and are providing a location guarantee.

>> Read here: State aid for gas prices despite profit? Company faces ban on bonuses and dividends

Whichever way you look at it, the gas price brake for industrial consumers recommended by the Commission of Experts is an inefficient crisis instrument. It’s good for international corporations, but bad for taxpayers and employees in Germany.

This is not a fundamental criticism of capitalism or of companies like BASF. It is a criticism of expert proposals that are not effective and end up being subsidized by the state only for a small group of capital owners.

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