26 Aug 2021, 10:15
Julian Wettengel

Next German govt must put CO2 pricing centre stage of “more European” climate policy – advisor

Source: CLEW/Wettengel.
A majority in parliament after the election determines who will lead Germany's next government. Photo: CLEW/Wettengel.

International partners can be assured that Germany’s next government coalition after the September election will not veer far off course of the country’s current climate and energy policy, says government advisor and director of two renowned research institutes Ottmar Edenhofer. Recently tightened greenhouse gas emissions reduction targets and the guidelines set by the European Green Deal have already defined a framework for the next four years, he told Clean Energy Wire. However, the next German leadership must put CO2 pricing at the centre of climate policy efforts and better explain to voters that greenhouse gas neutrality by 2045 in Germany is worth aiming for, but that it will not come for free. Edenhofer says that different governments under Chancellor Angela Merkel essentially wasted a decade before Fridays for Future, EU provisions and a Constitutional Court ruling forced the cabinet to act.

Ottmar Edenhofer is director and chief economist of the Potsdam Institute for Climate Impact Research (PIK), director of the Mercator Research Institute on Global Commons and Climate Change (MCC) and professor of the economics of climate change at the Technische Universität Berlin.

Clean Energy Wire: Germany’s national election is four weeks away. Governments and the public abroad are probably wondering what will change now after 16 years with Chancellor Angela Merkel at the country’s helm. Will international partners have to adjust to a completely new German climate and energy policy?

Ottmar Edenhofer: No, I do not expect a completely new climate and energy policy. From my point of view, two cornerstones have already set a certain framework for the next four years: first, the ruling of the Federal Constitutional Court and the subsequent amendment of the Climate Action Law. The new climate targets are quite ambitious. Greenhouse gas neutrality by 2045 – which is more than just CO2 neutrality – is an incredibly ambitious goal. The second cornerstone is the European Green Deal. It puts enormous additional pressure on Germany’s energy and climate policy. No matter what the next government coalition looks like after the election, it will have to deal with this.

I would not expect the next government to tighten climate targets even further, because 2045 is already a very ambitious target date. The core issue now will be the instruments: will the second emissions trading system at the EU level be introduced for transport and buildings? This is by no means certain, as there is considerable resistance. A big area that needs to be addressed is agriculture. But that is also shaped at the European level.

The next government must do something that is discussed far too little: it must put CO2 pricing centre stage, as core instrument of climate policy.

What matters now is that we learn that climate policy must meet two fundamental criteria. On the one hand it must be socially just, and on the other it must be cost-efficient. For years, people have said that cost efficiency is not so important, the main thing is that something happens. But I think we now have such ambitious goals that the issue of cost efficiency will be of fundamental importance. That's why we will put many instruments that we have now to the test – such as subsidy programmes or bans and bids, or the bureaucratic obstacles to the expansion of renewables.

What do you think the next government must do first?

I believe that the next government must do something that, in my view, is discussed far too little: it must put CO2 pricing centre stage, as a core instrument of climate policy.

I am concerned that some pretend that subsidy programmes alone can be used to advance the restructuring of the economy. Such programmes make sense when it comes to pilot projects, for example in the case of green steel, but the idea that immediate programmes or subsidies can be used to get things moving is problematic for two reasons. First, for many previous funding programmes, we have no evaluation at all of whether they have had the desired effect. Secondly, subsidy programmes tend to burden low-income households and favour high-income households. A case in point is the subsidies for e-cars.

Moreover, this approach assumes that mainly state subsidies will come into play. However, private investments must be mobilised to at least the same extent, which is only possible if the price relations on the markets are right. This extends to monetary policy, which can only become green if there are reliable and credible carbon price signals on the markets. In my view, the next government should make this paradigm shift. The budgetary leeway for very large additional programmes will be limited anyway.

What does such a carbon price mean for the voters? The President of the Bundestag, Wolfgang Schäuble, has recently said in an interview on the subject of the carbon price level that "People can bear the truth, even during election campaigns. Therefore, honesty does no harm." Do you agree -- and what would that truth be?

Yes, I fully agree. We know that where carbon prices have been successfully introduced, it has been through clear communication. People have to trust the government and they have to understand the effects of carbon pricing.

First, they need to understand that carbon prices make CO2-free alternatives profitable. Secondly, CO2 prices push back the use of fossil fuels. Thirdly, people need to understand that carbon prices generate revenues, which can be used to relieve low-income households.

We have to tell people that greenhouse gas neutrality in 2045 in Germany is worth doing, but that it will not come for free.

And people have to trust the government: the government is not just milking us, but has a genuine interest in climate policy, and it also relieves the burden on low-income households. We know from empirical studies that the approval of carbon prices increases when people understand that there will be fair and appropriate reimbursement.

Furthermore, I believe that we have to tell people that greenhouse gas neutrality by 2045 in Germany is worth doing, but that it will not come for free - it will cost something, but poor households can even benefit when appropriate revenue schemes are in place.

Do you think that these issues are properly addressed in the election campaign?

I hope so, but I fear that this is not the case. I think that many politicians still think that they can implement climate policy in such a way that people don't notice it. It was like that in the past. People didn't notice so much when a coal-fired power plant was taken off the grid. Of course, the electricity price in Germany is high due to the renewables levy, but here, too, one could find a very pragmatic way to start by taking the renewables levy out of the electricity price altogether and financing it through CO2 pricing, and by lowering the electricity tax.

However, I have the impression that politicians still shy away from this. Actually, now would be a good time to tell people that we need an international, European and national climate protection policy to avoid dangerous climate change, but that it will cost something.

A national election campaign always highlights national issues. However, climate change and energy transition are very international issues where cooperation with others is very important. Is this sufficiently reflected in the current debates?

German climate policy must become more European. For me, it is seen way too much through a national perspective. European policymakers, in turn, urgently need to cooperate globally, or invest their political capital, so that global cooperation becomes possible, especially between the U.S. and China and the EU - and then also to bring other countries like Japan or Russia on board. We need cooperation between the major emitters to keep to the 1.5-degree Celsius target. Germany alone cannot do it, Europe alone cannot do it.

We have to say: we are pursuing a credible national climate policy, but we want to embed it in the European Green Deal - which represents a sensational opportunity - and this Green Deal is in turn the prerequisite for us to be able to cooperate with the U.S. and China. The chances for international cooperation and for the start of a global coal phase-out have never been better.

We have actually almost wasted the decade between 2010 and 2020.

Let’s assess the climate policy of the current government. Considering the decision to phase out coal, the carbon price on fuels for transport and heating, the Climate Action Law including the recent reform and an earlier date for climate neutrality -- has any federal government ever done more for climate action?

I am not a spokesman for the current federal government, but it has to be said that climate policy has gone through many twists and turns and that we almost wasted the decade between 2010 and 2020. A lot happened at the last minute, but the path was difficult. If we just think about the fact that the entry price for the national emissions trading system was initially supposed to be 10 euros - absolutely ridiculous.

And we also have to say it was not only the government's own drive, but it was forced by Fridays for Future, by the Federal Constitutional Court, and by the European Green Deal. So, I wouldn't say that it was this great federal government that set the whole thing in motion by ingenious design. Nevertheless, through a very dialectical process, quite a lot came out in the end.

And in international comparison? Germany used to be considered an energy transition pioneer. Do you see the Germany of the past 16 years as a climate action pioneer?

No, I don't necessarily see Germany as a pioneer. Looking at the bare figures, the European Union is actually the only economic region in which the decoupling of emissions and economic growth has begun. Not fast enough, but it has begun. In the U.S., emissions have remained constant, but in all other regions they have risen dramatically.

The question of whether Angela Merkel will go down in history as a great climate chancellor has not yet been decided.

Yet, we have not even begun to realise what a 55 percent cut in greenhouse gas emissions by 2030 means. The targets we set ourselves for 2020 have already been missed. Up to now, politicians have always reacted in this way: when a short-term target was missed, an even more ambitious target was set for the long term. Far too little attention has been paid to developing instruments that actually lead to emission reductions and to doing so in a reasonably cost-efficient manner. This debate will fully catch up with us with the new government coalition.

On the positive side, we have the goal of greenhouse gas neutrality in Germany, which also means that there is no sector that can say 'I don't have to go there'. Every sector has to reduce emissions and there is a broad consensus on this goal. Moreover, it is positive that we no longer have debates about whether we want to pursue climate policy at all. Of course, this does not mean that all parties consider climate policy a priority; there are still many outdated reflexes. Many parties still think that climate action and economic growth are antagonistic forces. However, it must be understood that a delayed climate action will in the long run endanger prosperity in the 21st century. This is a paradigm shift.

Chancellor Merkel is a scientist and was Germany's environment minister for years - wasn’t it a stroke of luck for German climate policy to have someone like that as chancellor?

In a certain sense, it was a stroke of luck. Politics is always a process and even the powerful chancellor does not completely determine the rules of the game. There is an incredible number of influences from all directions. Her great strength - and this is quite outstanding - was that she understood the issues. You don't find many politicians who really understand the issues.

Merkel was a stroke of luck during that time: if you look at her decisions, from the nuclear phase-out to the anchoring of ambitious climate goals among the G7 and G20, these were all very laborious processes. She held her course and did not allow herself to be swayed, neither when the great disaster became apparent after the climate conference in Copenhagen, nor when climate-sceptics raised their voices again across Germany.

I understand that many people, especially the younger ones, are impatient, but Angela Merkel has held her course and has also made it possible for a new federal government to have a very good starting point.

How would you assess the climate policy record of the Merkel era?

The question of whether Angela Merkel will go down in history as a great climate chancellor has not yet been decided. If her successors pursue a credible and resilient climate policy at European and international level and we can say in retrospect that the EU and Germany have advanced international climate action to such an extent that we have succeeded in avoiding dangerous climate change, then Angela Merkel's climate policy will be judged and honoured as a precursor to this. But if her successors fail and do not succeed in avoiding climate change, then Merkel will be scolded. She will be condemned and her politics will be described as merely the art of the possible. Historical grandeur is only revealed in the success of future generations, as is so often the case.

Whether the history of German climate policy is ultimately one in which politics made the necessary possible, or whether it basically got tangled up in the minutiae of everyday political life, now depends on Merkel's successor.

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