Ifo Viewpoint No. 30: Save our Coal!

Hans-Werner Sinn
Munich, 27 November, 2001

In Germany coal is at a depth of 700 to 1500 metres, and the seams are 1.6 metres thick. In the United States hard coal can be open mined (e.g. in Montana and Wyoming) and the beds are as thick as 30 metres. It is no wonder that the coal Germany imports from the US only costs DM 82 per tonne, only a quarter of the cost-covering price at which coal can be extracted in Germany and half the price at which coal is actually sold in Germany thanks to state subsidies. Currently, ca 3.7 billion euros of public funds are spent on coal mining and artificially prop up the competitiveness of some 66,000 jobs. The replacement of the Kohlepfennig, a hidden tax to subsidize German coal, by a tax-financed subsidy for the producers necessitated by the October 1994 decision of the German Constitutional Court, has done little to change the material importance of subsidies for the industry. Without an infusion from the government, the German coal industry would have long since been carried to its grave.

The slogan used during the past decades in support of subsidy policies at reduced volumes has been "Save our coal (industry)", using the protection of jobs and the cushioning of structural change as arguments. The coal industry should be kept alive to provide a livelihood for the miners and to prevent social hardships.

There is no justification for these subsidies since they preserve a sector that provides such a minimal contribution to the economy that the beneficiaries are not prepared to pay the industry's workers enough to compensate them for the burden of their labour and their loss of leisure-time. Taxpayers' money is needed to make the coal industry viable. Such an intervention in the market process is not justifiable since it negates the basic selection property of markets according to which from the numerous technically possible products only those are realised that unambiguously pass the compensation test: a good is produced only when the money that the beneficiary is prepared to pay for it is sufficient to compensate all those who suffer disadvantages in the production, be it in the form of loss of time or health or in the form of a loss due to profits not realised from having employed the capital in other ways. The fact that not everything is produced that engineers could produce if they were allowed to is the true accomplishment of the market economy. It chooses what is sensible and bans the nonsensical to the drawers of its designers.

Coal is not the only sector that is kept alive by subsidies. In Germany a total of between 100 and 200 billion euros of public subsidies are paid to enterprises, a gigantic amount that not only costs the taxpayers a lot of money, preserving not only the wrong industry structures but also bringing new ones into being which otherwise would not have existed, thus creating permanent damage. In eastern Germany, the industrial ruins outside the cities bear testimony to this effect. Even so, subsidies for the coal industry break all records. Per worker and year, the state contributes some 56 thousand euros. If the mines were all closed, the subsides saved could go to letting the dismissed workers live in luxury hotels with generous daily allowances.

The argument that structural change must be cushioned since it would be unfair or unsocial to ask the affected workers to change industries and jobs has been unsound ever since justifications were made for supporting the grandfathers of today's miners. For the children and grandchildren, let alone their Turkish colleagues, who have been hired for hard work in the mines, it is absurd. In all these years there were ample opportunities to bring about structural change - without the social hardships that accompany dismissals - merely by not employing new miners.

A particularly strange argument for present policies is safeguarding Germany's energy supply, since these policies lead to the extraction and burning of coal, not its preservation. We live in a time when OPEC countries are induced to an excessively rapid extraction of their resources as a result of uncertain political conditions. Guided by the goal of selling off the natural resources they have and depositing the profits in Swiss bank accounts before new political forces do the same, so much oil as possible is pumped from the ground. The reserves are thus being depleted too rapidly, the prices are too low, and too few natural resources will be left for future generations. In this situation, any stable country with natural energy resources that gives greater priority to its future generations than to OPEC should think twice before extracting its resources today. This holds not only for the United States, England and Norway but also for Germany. The motto we need today is: "Save our coal, leave it in the ground".

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute