Germany’s Energiewende – The New Electric Mobility Strategy

I am pleased to see that Germany continues to drive its energy transition. The so-called ‘Energiewende’ (German for energy transition) is overhauling the country’s energy concept fundamentally. Thereby the three pillars of the new energy concept are reliability, environmental sustainability and economic viability. The government’s vision is to transform the country into a role model for energy efficiency and a green economy coupled with competitive energy prices and a high level of prosperity (BMWi, 2010). The four main political objectives of the energy transition are to combat climate change, to avoid the risks of nuclear power, to improve Germany’s energy security and to increase competition and growth in the sector (Pescia and Graichen, 2015). But there are more potential benefits to it, including the reduction of energy imports and therefore oil dependency and exposure to external energy supply shocks, as well as the strengthening local economies and the provision of social justice (Morris and Pehnt, 2015).

In order to achieve the ambitious vision, the government’s agenda includes:

  1. Cost-efficient expansion of renewables, e.g. expansion of offshore and onshore wind farming and increasing sustainability and efficiency in the use of bioenergy
  2. Enhancing energy efficiency of private households, the industry and the public sector, e.g. the modernisation campaign for buildings with the vision of energy-efficient buildings by 2050
  3. Shifting the energy mix away from nuclear power and fossil-fuel power plants toward renewable energy sources
  4. Improvements in the country’s grid infrastructure and storage technologies with demand-responsive electricity generation
  5. Electric mobility strategy with one million electric vehicles on Germany’s streets by 2020 and six million by 2030
  6. Energy research programme with focus on innovation and new technologies regarding renewable energies, energy efficiency and storage methods (BMWi, 2010).

Although some of the policy measures, which the government has adopted, are debatable, the overall plan is clearly well thought out. A month ago I already dedicated a blog post to the idea of ecological fiscal reforms (green tax shift) and eco-social market economies. In this post I used Germany as a textbook example for the evidence of the wide-ranging benefits of such green reforms.

In my opinion, the ‘Energiewende’ provides the necessary nudge to the industry, consumers as well as the public sector to enhance their energy efficiency and sustainability. It reshapes the incentives of economic actors in favour of green research, innovation and consumption. In addition, it is also a poster child for demonstrating that “coherent government policy can transform an industry” and that it is possible to “to blend low-risk feed-in tariffs with market price signals” (Fares, 2014).

The motivation for today’s post stems from the fact that Germany is now starting to implement its electric mobility strategy (item 5 on the agenda above). It is about to introduce a new nudge targeting electric cars. In particular, the German Federal Cabinet has just approved a new legislative package for the preferential treatment of electric cars. It will include a subsidy of 4,000 Euro when purchasing a new electric car and 3,000 Euro when purchasing a hybrid car. In addition, electric cars will be exempt from the motor vehicle tax for a period of 10 years (Tagesschau, 2016). This initiative for electric mobility will be funded jointly by the government and the automobile industry, each contributing 0.6 billion of funding. According to the government Daimler, VW and BMW have already agreed to the 50:50 split in costs (ZEIT, 2016). The initiative will be coupled with the roll out of charging points. This, in turn, will be funded by the Federal Government swallowing another 300 million of public funds.

The main goal of the latest initiatives for electric mobility is to achieve a more than ten-fold increase the amount of electric and hybrid cars from currently less than 50,000 to more than 500,000 in the short-run and to more than one million in the medium-run (Tagesschau, 2016). As noted earlier, electric mobility is at the heart of the country’s energy transition. Transport is currently one of the main drivers of Germany’s oil dependence. It continues to rely heavily on fossil fuels rather than renewable energy sources despite efforts like the development of the National Hydrogen and Fuel Cell Technology Innovation Programme (BMWi, 2010). This is why the government is now taking action. It is starting to pave the way for preferential treatment of electric cars in order to increase the incentives for both fleet operators and first-time private buyers to purchase an electric car and to drive its energy transition also in the area of transport.

Overall, the legislative package still has to be discussed and approved by the German Federal Parliament and Federal Council. However, the package is likely to go through shortly with the subsidy for the purchase of electric and electric cars being expected to already begin in May. Subsidies will be claimable through an online application facility (Tagesschau, 2016). So there are interesting times to come; especially whether the subsidy will be sufficient to increase the adoption of the electric mobility technology. Electric cars continue to carry an excessive price tag for their zero emissions image. Even under the assumption that both fleet operators and first-time private buyers care about the image associated with a zero-emission vehicle (BMWi, 2010), it is not clear whether this together with the government’s subsidy and tax exemption is an incentive large enough to justify the higher initial investment costs. One should not forget that it is ultimately the price which determines demand (and supply). The initiative has the potential to break ground, but it is unlikely to turn the larger share of society into electric car users; at least not yet. Still, I would argue that we are heading into the right direction due to the right policy mix. Firstly, Germany focuses on competition and market orientation. Secondly, Germany introduces incentives in favour of greener transportation without restricting society’s choices as well as important incentives for green innovation. Both are key to rethink transportation and mobility issues in a century where renewable energy sources are clearly on the rise.

 Thanks for reading,

Jasse


BMWi (2010). Energy Concept for an Environmentally Sound, Reliable and Affordable Energy Supply. Berlin: Federal Ministry of Economics and Technology. Retrieved from: http://www.bmwi.de/English/Redaktion/Pdf/energy-concept,property=pdf,bereich=bmwi,sprache=en,rwb=true.pdf

Fares (2014, 7 October). Energiewende. Two Energy Lessons for the United States from Germany. Retrieved from: http://blogs.scientificamerican.com/plugged-in/energiewende-two-energy-lessons-for-the-united-states-from-germany/

Morris, C., and Pent, M. (2015). Energy Transition: The German Energiewende. Berlin: Heinrich Böll Stiftung. Retrieved from: http://energytransition.de/wp-content/themes/boell/pdf/en/German-Energy-Transition_en.pdf

Pescia, D., and Graichen, P. (2015). Understanding the Energiewende: FAQ on the ongoing transition of the German power system. Berlin: Agora Energiewende. Retrieved from: https://www.agora-energiewende.de/fileadmin/Projekte/2015/Understanding_the_EW/Agora_Understanding_the_Energiewende.pdf

Tagesschau (2016, 18 Mai). Kaufprämien und Steuerboni für Elektroautos: Kabinett beschließt Förderung. Tagesschau Online. Retrieved from: http://www.tagesschau.de/wirtschaft/elektro-autos-103.html

ZEIT (2016, 27 April). 4.000 Euro Prämie für Kauf eines Elektroautos. ZEIT ONLINE. Retrieved from: http://www.zeit.de/politik/deutschland/2016-04/bundesregierung-elektroautos-subvention-kaufpraemie

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Why are we missing out on Environmental Institutions?

I worked on an assignment for my class Growth and Development Economics today which discusses the link between institutional development and economic growth in the context of South Africa. One of the core readings is the NBER working paper Institutions as the Fundamental Cause of Long-Run Growth by Acemoglu, Johnson and Robinson (2004). I scribbled down some little diagrams to grasp their argument about the link between the distribution of resources, political institutions and economic prosperity when I realised that the same chain of arguments could potentially be adapted to reason why we need well-defined property rights over natural resources and the establishment of an “environmental market” (I can’t think of a good word just now).

Acemoglu, Johnson and Robinson argue in their paper that there are two main state variables governing the system, i.e. determining long-run growth. The first variable is ‘political institutions’ which determine the distribution of de jure (institutional) political power. The second one is the ‘distribution of resources’ which determines de facto political power. There is also a variable considering the possibility for collective action if groups in society can coordinate to act as collective. However it is considerably weakened by the free-rider problem which makes it hard for groups to mobilize the public in their interest. In sum, these two variables are sufficient for calculating all other variables in the system, also economic performance as the bottom line. They see it as a “natural hierarchy of institutions” (p.5) with political institutions at the top which influence equilibrium economic institutions in the middle which in turn influence economic outcomes as the bottom line – both through direct and indirect channels (if I get it right here). A fundamental part of their theory is endogeneity, which makes the model a relatively complex social system, and the view that society is the backbone. Society both consciously chooses its economic institutions as well as the distribution of political power.

The theory can prove that political and economic institutions shape people’s incentives and enforce rules and regulation in society. It proves that property rights and the presence of efficient markets are a fundamental prerequisite for long-run economic growth. Therefore the question for my thought experiment today is: Can this insight help us improve our current state of environment protection, i.e. internalize the costs imposed by negative externalities like pollution, environmental degradation or traffic jams? Can it help us develop a framework for green, sustainable growth in the long-run?

environment

I think about it in a similar manner as the argument about political institutions; so start by replacing environmental for political institutions. Then there is a new system, let’s call it ‘Market Environmentalism’ at the top of the natural hierarchy. In the top system society determines the choices through de facto and de jure (institutional) environmental power. If it can coordinate to act as a collective, e.g. demonstrations, environmentalist groups, petitions, it can create demand for strong environmental institutions. On the other hand, there is the aspect of how resources (wealth) are distributed in that society. If they are held by a small share of the population and it can exert significant power or if companies have close ties with politics, then they can lobby them in favour of their individual interests or business. While collective action tends to establish the demand for the environmental institutions, lobbying probably tends to be the opposite. I called this first system in the diagram ‘Market Environmentalism’ because it reminded me of the second theme ‘environment as a property’ and ‘free market environmentalism’ in my blog post 2016 vs 1996 on 23 April.

In the top system the environmental institutions set the framework for the ‘green’ part of the economy. They establish the rules for the natural resource market/ environment and create property rights over environmental resources leading to an efficient ‘environmental market’. This is then transmitted into the equilibrium market economy where it may influence society’s choice over economic institutions shifting the dynamic equilibrium. Ultimately the bottom line is economic performance and environmental sustainability achieved together. Once this circle is set off it may be virtuous in nature stabilizing the upper systems in the natural hierarchy.

One might think about a conventional economy like lacking the upper part of the diagram due to lacking environmental institutions. A solution could be to

  • enable collective action to establish sufficient demand for environmental institutions
  • achieve a more equal distribution of resources to prevent the influence of individuals’ interests preventing the establishment of environmental institutions
  • establish environmental institutions with the help of external actors in the international environment.

I know that the diagram is somewhat simplistic but it is a good start for critical thinking! Thanks for reading,

Jasse


Acemoglu, D., Johnson, S. and Robinson, J. (2004). Institutions as the Fundamental Cause of Long-Run Growth. NBER Working Paper No. 10481. Retrieved from: http://www.nber.org/papers/w10481

Is Caring for the Environment a Luxury Good?

I finally got hold of a library copy of Naked Economics: Undressing the Dismal Science by Charles Wheelan. In the first chapter The Power of Markets Wheelan notes that

“concern for the environment is a luxury good” (2012, p.7).

The argument is the following if I get it right: People with higher incomes can basically afford to care, whereas poorer people have a smaller fraction of their incomes available to spend on environmentally-conscious goods as more of their income goes towards necessities. Intuitively I agree with Wheelan. Environmentalism carries a hefty price tag in today’s economy which is counterproductive to promoting sustainability. If one wants to cater for the mass market it is all about prices; they create the incentives to buy and not their ‘environmental-friendliness’ grading. If sustainable products become cheaper than the conventional alternatives, this induces people to change their consumption pattern. They will substitute something for the more sustainable alternative and will thereby also make society better off in the long run (positive externality).

But here is today’s question: if a sense for environmentalism does increase with income, does this also hold for countries? Do countries care more about the environment as they get richer? It is not an easy question but I’ll try to come up with some data for a short post today. I went to the OECD’s Green Growth Indicators and downloaded the following indicators to STATA for the 34 OECD countries for the period 2000 to 2012:

  • Real GDP per capita
  • Development of environment-related technologies, inventions per capita
  • Municipal waste generated, kg per capita

Firstly, I want to test whether there is a positive correlation between the countries’ income levels and their focus on research and development in cleaner technologies. The correlation turns out to be 0.48 for my dataset and here is how the story looks like for the latest year available:

Real GDP per capita vs Inventions per capita 2012

There is a positive relationship between inventions per capita and real GDP per capita in the data. However, there are considerable outliers worth looking at. Firstly, there is Luxembourg which is isolated from the rest of the OECD countries. It could be a negative outlier given its high income level, i.e. the inventions per capita predicted might be higher than observed. Then there is a cluster of six countries that do not fit into the picture: Austria, Denmark, Finland, Japan, Korea and Germany. Given their income levels they produce more environmentally-related inventions per capita than predicted (positive outliers). For the remainder of countries the variability in outcomes increases with higher income levels (heteroskedasticity). However, the initial hypothesis seems to hold at a crude level. As income levels rise countries tend to develop more environment-related technologies which I take as a proxy for ‘caring for the environment’ here.

Real GDP per capita vs Waste per capita 2012

Before finishing off I want to picture a second story though. People not only care more for the environment as they grow richer, they also consume more, i.e. they become more consumption-oriented. So while richer people can afford to care for the environment they do not necessarily choose to do so. At country level, this might well be depicted in the diagram above. Higher incomes are significantly positively correlated with more waste per capita (0.64) in the dataset. While the innovative outliers Japan and Korea also produce less waste given their income levels and compared to other countries like New Zealand or Israel which are in their income group, the innovative outlier Denmark is actually at the high end of the spectrum in terms of waste together with Switzerland and the USA.

In sum, I would add to the quote from the introduction that while caring for the environment might well be a luxury good there is a second aspect to the discussion at country level: whether a country that can afford to spend more on these more sustainable goods actively chooses to do so and whether it creates the right incentives for its population. If not, then the relationship between income and spending on more environmentally friendly goods, technologies etc. breaks down in practice. Furthermore, there are noteworthy outliers that have decoupled income from innovation in environmental technologies.

Thanks for reading!

Jasse


OECD (2016). Green Growth Indicators Database – Green Growth Indicators (Last updated: April 2016). [Data file] Retrieved from OECD.Stat database: http://stats.oecd.org/Index.aspx?DataSetCode=GREEN_GROWTH#

Wheelan, C. (2012). Naked economics: undressing the dismal science. New York, N.Y.: W.W. Norton & Company.

The Great Green Tax Shift – Evidence from Germany

I would like to dedicate today’s post to ecological fiscal reforms and eco-social market economies. It is inspired by Paul Krugman’s essay Earth in the Balance Sheet: Economists Go for the Green in The Accidental Theorist (1998). In the essay Krugman proposes a green tax shift away from taxes on employment and income towards pollution taxes. Therefore the first half the post looks at the concept of such a green tax shift. In the second half I want to take Germany as a textbook example to provide evidence for the wide-ranging benefits of such a tax shift.

What is the concept of a green tax shift? A green tax shift (also called ecological fiscal reform) is a reform of a country’s tax system by shifting existing taxes towards pollution taxes. Its aim is to facilitate a long-term transition to sustainable development (Beauregard-Tellier, 2006). These pollution taxes as well as taxes on other negative externalities include for example carbon taxes, waste disposal taxes or taxes levied on companies for effluents that lead to a degradation of the environment. The IMF goes further than this and names a second dominant economic instruments for controlling pollution, namely tradable permits and emissions taxes (Norregaard & Reppelin-Hill, 2000).

The main idea of a ecological fiscal reform is to induce companies to internalize the social costs they impose on society via fiscal policy. This is because in the past companies have benefited from facing production costs far less than their true social costs. Things like the depletion of resources, pollution and disposal of waste water into rivers do not have a price tag on them and are therefore not factored into the private costs of firms. This problem is normally associated with public goods (like fresh air and water) which suffer from the free rider problem or the tragedy of the Commons. Public goods are by definition non-excludable and non-rival inducing people to overuse resources, pollute etc. However, the ecological fiscal reform also targets individuals through taxes on fossil fuel or electricity consumption. Therefore such a green tax shift is both levied on consumers and producers.

The green tax shift concept is more complex than introducing pollution taxes. It recognises that – like any tax – it comes with side effects, i.e. incentives to work and save less ultimately reducing GDP. To mitigate this effect, the revenue collected by the green taxes is offset by reductions in taxes like social security (Krugman, 1998). To keep GDP stable a country should pursue a revenue neutral tax shift and maintain the same tax progressiveness. In addition, the country probably has to take measures to mitigate the effects on the country’s poorest people because they tend to spend relatively more of their income on gas, electricity, water and transport (BBC, 2004).

Nonetheless, the burden for such a green tax shift to work is high. Reforms need to be accompanied by the improvement of local amenities. One issue is to ensure the supply of local products and services to reduce greenhouse gas (GHG) emissions to a minimum level. This could work in practice if people need to spend less on transport and have a higher share of their income available for locally sourced products and services. Also, such a green tax shift only works if lifestyle becomes more focused living “locally” in the community. In such an environment there would be no need for commuting anymore. There are many levers that need to be put in place to make this vision reality. Examples are more telework or local permaculture (e.g. urban farming in Cuba).

What would be the potential benefits of such a shift? Firstly, if the revenue from green taxes exceeds the amount needed for the tax relief in other areas it could be used to subsidise research and development in sustainable energy. Furthermore, one would hope to see a change in the society’s attitude towards more environmentally friendly cars, housing and consumption goods. What is more, it could lead to a rethinking in the real estate sector favouring green buildings if their return on investment increases to levels above the one of conventional buildings.

According to Krugman (1998, p.171) there are three main problems that have led the Great Green Tax Shift to be a “complete political nonstarter”; he calls them three I’s:

  1. Ignorance
  2. Interests
  3. Ideology

As far as I understand, ignorance is associated with the credibility of levying taxes on the one hand and lowering taxes on the other hand. Public debates tend to be biased towards tax increases, ignoring the tax relief in other categories. Secondly, interests play an important role. “Anti-environmental” groups like energy companies tend to lobby governments actively while society is less powerful when it comes to lobbying “pro-environment”. Lastly, ideology is a major burden. The left-wing tends to declare pollution as evil and that “it is immoral to put a price on it” (Krugman, 1998, p.172) because it would ultimately justify pollution and the right-wing completely refuses government action in favour of free markets. In addition to these problems mentioned by Krugman one should also note that determining the correct level of taxation and designing a complete new green tax collection system poses a huge challenge. It could lead to further distortions and unintended consequences.

In the remainder of the post I want to look at Germany and its Ecological Tax Reform Act passed on 24 March 1999. This reform led to an initial increase in fossil fuel taxation and a new tax on electricity consumption. Over the period from 2000 to 2003 there were four further tax increases. The objective of the Ecological Tax Reform Act is to mitigate carbon dioxide emissions and foster job creation as well as more innovation (IEA, 2013). The reform was mainly a green tax shift because up to 90% of the revenue from the green taxes went to “offset payroll contributions from employers and employees with much of the remainder going towards the funding of renewable energy schemes” (IEA, 2013, p.28). A drawback of the reform is that there are some exemptions for certain manufacturers in energy-intensive industries.

green tax shift.png

What were the effects of the green tax shift in Germany? For this I obtained data from the World Bank’s World Development Indicators on aspects like Germany’s GDP and GHG emissions. Most notably GHG emissions fell – mainly in the transport sector – and people reduced their energy consumption. The fall in GHG emissions is even more impressive because GHG emissions have decreased despite people using more transport. This finding is in line with the concept discussed before, i.e. inducing people to change habits towards cleaner cars and new technologies.  The IEA also reports that environmental taxes on transport as percentage of total taxation have fallen from 5.2% in 2005 to 4% in 2010. This refutes the argument that a green tax shift could be a major burden for the economy. This can also be seen in the diagram. It seems that GDP per capita has not been constrained by the Ecological Fiscal Reform Act. What is more, research and innovation seem to have taken off to new levels if one uses Researchers in R&D (per million people) as an indicator. The IEA also notes that Germany is now “among the world leaders in terms of energy-efficient buildings” (2013, p.41) due to heat demand reduction, its upcoming clima-neutral policy for new buildings and reduction in primary energy demand. Hence, rather than an adverse effect on GDP the green tax shift seems to have had positive effects due to higher R&D and the search for new cleaner technologies. This induces more sustainable wealth-creation and a future-oriented economy. Innovation is one of the drivers of productivity and a main determinant of long-term growth (see augmented Solow growth model). This seems to hold for Germany as fiscal policy has induced the society to rethink. Therefore the IEA rightly concludes that Germany has mastered the green tax shift and that the Ecological Tax Reform Act has allowed the country to decouple economic growth from GHG emissions with the help of renewable energy and improved energy efficiency.

That’s me for today! I hope you enjoyed today’s topic as much as I did. I was surprised to find such a forward-looking essay on a more eco-social market and ecological fiscal reforms in a book of the 1990s while it took the OECD until 2011 to publish an Environmental Taxation Guide for Policy Makers. Germany is only one of few OECD countries having implemented such a shift but the concept has the potential to change a lot!

Thanks for reading!

Jasse


BBC (2004, October 26). Green taxes ‘would hit poor most’. BBC News. Retrieved from: http://news.bbc.co.uk/2/hi/uk_news/3955285.stm [Accessed 20/04/2016].

Beauregard-Tellier, F. (2006). Ecological Fiscal Reform. Ottawa, Canada: Parliamentary Information and Research Service. Retrieved from: http://www.lop.parl.gc.ca/content/lop/researchpublications/prb0595-e.pdf [Accessed 20/04/2016].

IEA (2013). Energy Policies of IEA Countries: Germany 2013 Review. Paris, France: International Energy Agency. Retrieved from: https://www.iea.org/publications/freepublications/publication/Germany2013_free.pdf [Accessed 20/04/2016].

Krugman, P. (1998). The Accidential Theorist: And other Dispatches from the Dismal Science. New York, N.Y.: W.W. Norton & Company.

Norregaard, J., and Reppelin-Hill, V. (2000). Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice (Working Paper No. WP/00/13). Retrieved from International Monetary Fund website: http://www.imf.org/external/pubs/ft/wp/2000/wp0013.pdf [Accessed 20/04/2016].

OECD (2011). Environmental Taxation: A Guide for Policy Makers. Retrieved from: http://www.oecd.org/env/tools-evaluation/48164926.pdf [Accessed 20/04/2016].

World Bank, 2016. World Development Indicators. [data] Retrieved from World Development Indicators (WDI) database: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators&preview=on [Accessed 20/04/2016].