Ifo Viewpoint No. 131: Requiem for Germany’s feed-in tariffs

Hans-Werner Sinn
Munich, 28 February 2012

Many opinions on climate change were voiced at a recent conference organised by the Bavarian Academy of Sciences, but not one speaker at the event would have spoken in favour of retaining Germany’s Renewable Energy Resources Act (EEG), with its famous system of feed-in tariffs. For it is a fact that the EEG does nothing for the climate, but it is extremely expensive.

As convincingly shown by calculations presented by the RWI, an Essen-based scientific research institute, the cash value of the feed-in tariff surcharge on normal electricity prices for solar power panels that have already been installed amounts to over EUR 100 billion, and the surcharge last year alone totalled around EUR 12 billion, or the equivalent of four maglev rail links from Munich airport to its central station (the cost of one such rail link would supposedly have been ruinously high). The fact that the Germans currently already pay twice as much for their electricity as the French is not only due to a shortfall in nuclear power, but also to Germany’s excessive subsidization of green power. The German Minister of Economics Philipp Rösler is right to demand a U-turn in policy.  

The EEG has no impact on the climate because it conflicts with the European emissions trading scheme, which covers 99 percent of CO2 emissions from power production. The emissions trading scheme was introduced in 2005 and is now reaching the end of its second trading period. The biggest markets for the emission allowances allocated to power stations are in Amsterdam and Leipzig. However, regardless of where these allowances are used, the EEG cannot reduce CO2 emissions since the cap, or the total volume of allowances, is determined in Brussels. The green power that the EEG gives rise to in Germany may supplant fossil-based power at a national level, but the EEG simultaneously drives allowances out of the German market and lowers their price. These cut-price allowances sell well in other EU countries, where they increase CO2 emissions by exactly the same amount as Germany reduces them. So the coal and gas-fired power stations simply move to Poland or Italy instead of being located in Germany.

That does not constitute a disadvantage of emissions trading, but an advantage. For trading creates a uniform CO2 price, stimulating savings all over Europe and driving them to the point at which the last ton of CO2 saved generates abatement costs equal to the price of an allowance, and since the allowance costs the same everywhere, all abatement costs for the last ton are the same. That is the condition for minimizing the aggregate abatement costs across all power station operators in Europe. The EEG distorts this condition and increases the average electricity costs per kilowatt hour in Europe as a whole. Since only the German electricity price increases, while foreign prices fall due to decreasing allowance prices, it follows that the standard of living in Germany is reduced by the EEG to an even greater degree than it is increased in the rest of Europe.  

The EEG does not even support green technologies, because by lowering the price of fossil-based electricity it smothers the chances of producing green electricity in the rest of Europe, which does not enjoy the German EEG feed-in tariffs. So while Germany defaces its own countryside with huge wind turbines, it is effectively preventing solar plants from developing in Estremadura.  

Supporters of the EEG argue that it has enabled German industry to develop markets that will prove very lucrative in the future, but this argument is also unfounded. It is entrepreneurs willing to invest their own money who are needed to open up new markets, not bureaucrats with public money to spend.

Incidentally, the EEG provides as much support for green power plants imported from China as it does for their domestic counterparts. If the aim is to promote German technologies with a view to creating spill-over effects, then German production should be subsidized, not the demand of German households.  

However, the main problem with the market development argument is that the market for renewable energy will be living off public subsidies well into the foreseeable future and is not driven by the best interests of its customers. What happens if states no longer have the resources to support renewable energy, or are less environmentally-conscious than Germany? In such cases production is boosted for a market that doesn’t really exist.

US President Barack Obama, who needs the funds at his disposal to deal with the financial crisis, has reluctantly cut subsidies for American wind turbines and solar power plants. The costs of the financial crisis in Europe should discourage its citizens from continuing to throw good money after bad by financing experiments in green policy too.

Hans-Werner Sinn Professor for political economy and public finance President of the Ifo Institute   * Published under the title “Abgesang auf das EEG”, WirtschaftsWoche, No. 6, 6 February 2012, p. 40.