Economist Hans-Werner Sinn On The Logical Flaws In Climate Policy And Green Energy Subsidisation

  • Date: 09/06/10

Neue Zürcher Zeitung: The Swiss National Council dropped a green tax on petrol and diesel from the carbon bill earlier this week. Would such a fee, which will be returned to the public in other form, not be a useful market instrument of climate policy?

Hans-Werner Sinn: Of course fossil fuel consumption in Switzerland would be reduced by a green tax as the price for fossil energy would rise. However, does this constitute a real benefit for the climate? One has to ask what would happen to the quantities of fuel which would no longer be bought in Switzerland.

Q: And what would happen to these quantities?

A: They would be sold elsewhere. Any such tax would only help the climate if the coal, oil and natural gas which would not be bought in Switzerland remained in the ground. The green tax would have to induce the oil sheikhs to pump less oil. But that won’t happen. Neither Switzerland nor any other country will manage to bring down world market prices for oil by means of a CO2 tax that would make the extraction of oil no longer worthwhile.

Q: Are taxes thus in principle not a useful way to make a contribution to tackling climate change?

A: Indeed. There is a fatal flaw in the design of such taxes: It is assumed that as fuel consumption goes down, fewer greenhouse gases are emitted into the atmosphere. But this reasoning is far too naive to be taken seriously because the unused amount of fossil fuel will simply be consumed elsewhere. Anyone who claims that environmental taxes are a contribution to solving the CO2 problem must demonstrate that the unused amount of oil, gas and coal remains buried in the earth. However, this would not even happen if all countries of the world were to introduce such a tax because world market prices cannot be pushed down where extraction is no longer profitable. After all, the extraction costs are only a tiny fraction of the overall price.

Q: The alternative to CO2 taxes is international emissions trading. But that is difficult to implement if at all.

A: It is like this: Climate change can only be tackled if all countries participate. An international emission trading system would be the best solution. For in contrast to carbon taxes, the flow of oil, coal and gas could really be influenced. Many are not aware that we already have an emissions trading system, run by the UN system, which at the moment covers 30 percent of CO2 emissions. If we could extend this UN system to almost 100 percent, then we have a cartel of fuel consuming countries against the fuel producing countries. Thus you could get not only the environmental problem under control, but at the same time some of the profits of the oil sheiks and gas oligarchs would flow into the pockets of the finance ministers of the consuming countries.

Q: Your reasoning is understandable. Yet regarding climate change it is important to act quickly. Until all countries are willing to get involved in such a system too much time will be lost.

A: That’s right. But it is not an argument to take ineffective measures. It is pointless to do anything in our own country simply for feeling good about it. The most important thing is to do something for the climate. And we only do something for the climate if we reduce the extraction quantities of fossil fuels. That is not possible by means of taxation but only by global quantitative restrictions.

Q: Don’t you think that it is the order of the day is to encourage renewable energy, for instance by means of feed-in tariffs?

A: This is also useless because of the above mentioned reasons. The feed-in tariffs for green electricity in EU member states cannot even reduce the pan-European demand for fossil fuels. If we replace fossil fuels by green energy in Germany, which releases emission certificates, we simply enable other EU member states to emit more greenhouse gases accordingly, thanks to the European emissions trading system The total emissions of CO2 in Europe are determined to the last ton by the amount of issued emission allowances. Feed-in tariffs for green electricity cannot reduce this amount any further.

Q: But at least feed-in tariffs for green energy have contributed to reduction of the costs for such plants.

A: That is correct. But the green electricity rates are still higher than the cost of fossil electricity or electricity from nuclear power. And it is precisely because of international mechanisms – global trade in fossil fuels and Europe-wide emissions trading – that you cannot implement climate protection by these measures. The public debate is short-sighted and superficial, because the demand for fossil fuels and the functioning of the markets for allowances and fuel are not taken into consideration.

Q: I take it that you are also against the proposed state funding of electric cars in Europe?

A: Yes, indeed. Sarkozy is donning himself in a green cloak in order to foster a competition in Europe between French nuclear power and German wind turbines and to remove competitive disadvantages of the French car industry along the way. This has nothing to do with climate protection. A different case is the recent Chinese support of electric cars. They have the goal to improve the air quality in heavily polluted cities – which is an acceptable nexus.

Q: Key to the desire for public funding of eco-energy is certainly also the fear of nuclear power.

A: Other forms of energy are also dangerous, as we can currently observe with the oil spill in the Gulf of Mexico.

Q: Many in Switzerland envy the jobs which have been created in Germany in the green energy sector. This is also an argument of the Cleantech Initiative of the Social Democrats.

A: If we force people to spend their money on good B instead on good A, then there will be fewer jobs created in industry A and more jobs created in industry B. What is the point of using the new jobs that are created in industry B as evidence for the success of such a policy? If so, then you would have to calculate the net change in jobs. But that is rather negative because the green energy sector is less labour intensive than, for example, the local service sector.

Q: Is it not a good idea to prepare yourself for a change of the power supply and position your own economy accordingly?

A: If these future developments were clear and obvious, then every company would have sufficient incentives to research and develop future-oriented products anyway – without any government assistance. But I cannot believe that a Swiss politician is able to understand the global market better than an entrepreneur who risks his own money. When it comes to environmental and energy policies, the state should limit itself to similar start-up support as they provide other industries – but not more than that.

Q: Are not you worried that you provide arguments for those circles that are against climate change measures out of pure self-interest?

A: The climate problem is so serious that we cannot afford to play around with electric cars and unilateral approaches. We shouldn’t persuade people that such measures will defuse the situation. Instead, we must use effective instruments, and we cannot avoid putting heavy political pressure on China, the United States and India to succeed in a more efficient global emission certificates trading.

Switzerland is currently revising its CO 2 law. The commitment period for greenhouse gas reductions are running out and there is a Climate Initiative ready that calls for a reduction of CO2 emission in Switzerland by 30% in 2020 compared to 1990. The Parliament wants to meet the Climate Initiative with a total revision of the CO2 law. The National Council has already decided a new climate target this week. Greenhouse gases are to be reduced by 20 percent compared to 1990 until 2020. The proposal of the government, if required, to put a CO2 tax on petrol and diesel has been dropped.

At the international level, efforts to achieve a climate agreement continue. Currently the Member States of the UN Climate Convention – including Switzerland – meet in Bonn, Germany to prepare for the upcoming climate conference. This conference will take place in Cancun, Mexico, at the end of the year. After last year’s climate conference in Copenhagen has ended with a modest result, there are no great expectations. Many diplomats and environmental lobbyists are sobered. Currently, hardly anyone expects that it will be possible to adopt a binding international climate treaty in Cancun.

Profiled economist

Hans-Werner Sinn is one of the most distinguished economists. He is the author of much-acclaimed publications and takes part in political debates. Recently, he has strongly expressed his expert opinion in financial and European crises. Ever since his book “The Green Paradox – A plea for an illusion free Climate Policy” (2008), this supporter of nuclear power has become an important voice in the climate debate. Born in 1948 in Westphalia, Sinn is Professor of National Economy and Finance at the University of Munich and President of the Ifo Institute for Economic Research.

Interview: Davide Scruzzi/Markus Hofmann, Neue Zürcher Zeitung, 5 June 2010

Translation: Philipp Mueller


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