Germany suffers from wrong energy policy

The country long ago suffered from unemployment and slowing GDP growth, but today it has another disease

Whatever one may say about Russian President Vladimir Putin, his war against Ukraine has turned Europe’s eyes on a long-underappreciated truth. One is that even after more than 70 years of relative peace on the continent, disregard for military security poses grave dangers.

Another issue is that the ‘green dream’ of a modern economy powered exclusively by renewable energy remains out of reach, and reliable access to affordable energy supplies remains essential.

While the first truth became clear shortly after the Russian army invaded Ukraine on February 24th, the second truth slowly permeated the public consciousness. Indeed, many are calling for an embargo on Russian gas imports from Europe, arguing that this would not only undermine Russia’s ability to wage war, but would also accelerate its progress towards green nirvana. is doing. .

Illustration: Brave

New research reveals this argument that it is an illusion. If gas supplies from Russia were cut off, Germany would not be able to produce 300 of the most gas-intensive products. Indeed, the study points out that these products can be replaced by imports.

However, this assessment fails to account for the welfare loss resulting from Germany having to pay much higher prices for these products, a loss that ripples through the economy.

Due to the terms of trade effect, the welfare of consumers of gas and fuel-intensive commodities declines as the prices of these currently imported commodities rise. The impact of the gas embargo on European GDP appears small because this price increase is not included in the definition of real GDP.

Moreover, it’s not just the direct consumers of the 300 products that are affected. For example, Germany’s downstream and complementary value-added industries would be uncompetitive if many chemicals such as methanol and ammonia, which are the basis of fertilizer production, had to be imported from the United States rather than produced domestically. There is a possibility.

So many jobs could be affected until a new balance is found. No wonder BASF, the world’s largest chemical company, has decided to invest up to €10 billion ($10.38 billion) in a new plant in China.

Replacing fossil fuels with renewable energy is not the solution many believe. Weather-dependent fuels such as wind and solar are too unpredictable to reliably power modern economies. That said, ‘adjustable’ energy sources such as coal, gas and nuclear are still essential to mitigate variability by fluctuating inversely to wind and solar power.

In the event of a prolonged ‘dark slump’, when the wind is not blowing and the sun is not shining, these energy sources will have to meet all their energy needs on their own.

This problem is likely to be exacerbated by the adoption of electricity over petrol-powered transportation, heating and appliances, which will create even greater demand for electricity, with a proportionately growing inventory of adjustable energy plants. You will need. For Germany, which eschews coal and nuclear power, this means gas power plants, but gas is already scarce and another solution must be found.

Some might argue that this is what the battery is for. Collect energy when available and store it until needed.

But while electric vehicle batteries, for example, may one day be able to soften short-term fluctuations in energy access, we’re not there yet. Even with more advanced battery technology, electric transport would stop if there was no wind or sunshine for a day or two.

Electric vehicles will exacerbate the seasonal buffering problem. So how long until we have batteries that can store enough power generated from the sun in summer and storms in autumn to offset the seasonal fluctuations in renewable energy supplies and keep not only our cars, but our entire economy running through the winter? Will it take?

A more realistic, though still distant, future will rely on hydrogen-fueled power plants to fill the gap left by wind and solar.

However, in order to produce hydrogen economically, it is necessary for the electrolyzer to supply electricity smoothly and stably, and the electrolyzer itself is supposed to provide this. It remains to be seen how this dilemma can be resolved.

The Ukraine War ruthlessly exposed the shortcomings of the green energy transition, forcing countries such as Germany to experiment with real-time energy. For now, they have little choice but to buy very expensive supplies of liquefied natural gas, import and extract more local natural gas, and rely on locally produced or imported nuclear energy. There is none.

Twenty years ago Germany was called Europe’s sick man because of its high unemployment, weak domestic demand and low GDP growth. Today the country seems to have another disease. This time, it is due to unrealistic and ambitious energy policies. Recovery can be painful.

Hans-Werner Sinn, Emeritus Professor of Economics at the University of Munich, is former Director of the Ifo Institute for Economic Research and a member of the Advisory Board of the German Federal Ministry for Economic Cooperation and Development.

Copyright: Project Syndicate

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