Learning from Others' Mistakes

Here is the summary of an October 2009 report from the Rheinisch-Westfälisches Institut für Wirtschaftsforschung titled: "Economic impacts from the promotion of renewable energies: The German experience"

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Although renewable energies have a potentially beneficial role to play as part of Germany’s energy portfolio, the commonly advanced argument that renewables confer a double dividend or “win-win solution” in the form of environmental stewardship and economic prosperity is disingenuous. In this article, we argue that Germany’s principal mechanism of supporting renewable technologies through feed-in tariffs, in fact, imposes high costs without any of the alleged positive impacts on emissions reductions, employment, energy security, or technological innovation.

First, as a consequence of the prevailing coexistence of the Renewable Energy Sources Act (EEG) and the EU Emissions Trading Scheme (ETS), the increased use of renewable energy technologies triggered by the EEG does not imply any additional emission reductions beyond those already achieved by ETS alone. This is in line with Morthorst, who analyzes the promotion of renewable energy usage by alternative instruments using a three-country model. This study’s results suggest that renewable support schemes are questionable climate policy instruments in the presence of the ETS.

Second, numerous empirical studies have consistently shown the net employment balance to be zero or even negative in the long run, a consequence of the high opportunity cost of supporting renewable energy technologies. Indeed, it is most likely that whatever jobs are created by renewable energy promotion would vanish as soon as government support is terminated, leaving only Germany’s export sector to benefit from the possible continuation of renewables support in other countries such as the US. Third, rather than promoting energy security, the need for backup power from fossil fuels means that renewables increase Germany’s dependence on gas imports, most of which come from Russia. And finally, the system of feed-in tariffs stifles competition among renewable energy producers and creates perverse incentives to lock into existing technologies. Economic impacts from the promotion of renewable energies

Hence, although Germany’s promotion of renewable energies is commonly portrayed in the media as setting a “shining example in providing a harvest for the world” (The Guardian 2007), we would instead regard the country’s experience as a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits. As other European governments emulate Germany by ramping up their promotion of renewables, policy makers should scrutinize the logic of supporting energy sources that cannot compete on the market in the absence of government assistance. Such scrutiny is also warranted in
the US, where there are currently nearly 400 federal and state programs in place that provide financial incentives for renewable energy.

History clearly shows that governments have an abysmal record of selecting economically productive projects through such programs. Nevertheless, government intervention can serve to support renewable energy technologies through other mechanisms that harness market incentives or correct for market failures. The European Trading Scheme, under which emissions certificates are traded, is one obvious example. Another is funding for research and development (R&D), which may compensate for underinvestment from the private sector owing to positive externalities. In the early stages of development of non-competitive technologies, for example, it appears to be more cost-effective to invest in R&D to achieve competitiveness, rather than to promote their large-scale production.

In its country report on Germany’s energy policy, the International Energy Agency recommends considering ‘‘policies other than the very high feed-in tariffs to promote solar photovoltaics.’’ This recommendation is based on the grounds that ‘‘the government should always keep cost-effectiveness as a critical component when deciding between policies and measures.’’ Consequently, the IEA proposes policy instruments favouring research and development. Lesser and Su concur with this viewpoint: ‘‘Technologies that are theoretically promising, but unlikely to be competitive for many years, may be best addressed under other policies, such as publicly funded R&D.’’ This reasoning is particularly relevant for solar cells, whose technological efficiency is widely known to be modest and, hence, should be first increased substantially via R&D.

Instead of a policy instrument that aims at pushing technological improvements, however, Germany’s support scheme of renewable energy technologies resembles traditional active labour market programs, which have been demonstrated in the literature to be counterproductive. It bears particular noting that the long shadows of this economic support will last for another two decades even if the EEG were to be abolished immediately.