Political Climate
Oct 21, 2009
Economic impacts from the promotion of renewable energies: The German experience

Final report - October 2009, Project team: Dr. Manuel Frondel, Nolan Ritter, Prof. Colin Vance, Ph.D

The allure of an environmentally benign, abundant, and cost-effective energy source has led an increasing number of industrialized countries to back public financing of renewable energies. Germany’s experience with renewable energy promotion is often cited as a model to be replicated elsewhere, being based on a combination of far-reaching energy and environmental laws that stretch back nearly two decades. This paper critically reviews the current centerpiece of this effort, the Renewable Energy Sources Act (EEG), focusing on its costs and the associated implications for job creation and climate protection. We argue that German renewable energy policy, and in particular the adopted feed-in tariff scheme, has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into the country’s energy portfolio.

To the contrary, the government’s support mechanisms have in many respects subverted these incentives, resulting in massive expenditures that show little long-term promise for stimulating the economy, protecting the environment, or increasing energy security. In the case of photovoltaics, Germany’s subsidization regime has reached a level that by far exceeds average wages, with per-worker subsidies as high as US $ 240,000.

Due to their backup energy requirements, it turns out that any increased energy security possibly afforded by installing large PV and wind capacity is undermined by reliance on fuel sources - principally gas - that must be imported to meet domestic demand. That much of this gas is imported from unreliable suppliers calls energy security claims further into question.

Claims about technological innovation benefits of Germany’s first-actor status are unsupportable. In fact, the regime appears to be counterproductive in that respect, stifling innovation by encouraging producers to lock into existing technologies. In conclusion, government policy has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into Germany’s energy portfolio. To the contrary, Germany’s principal mechanism of supporting renewable technologies through feed-in tariffs imposes high costs without any of the alleged positive impacts on emissions reductions, employment, energy security, or technological innovation. Policymakers should thus scrutinize Germany’s experience, including in the US, where there are currently nearly 400 federal and state programs in place that provide financial incentives for renewable energy.

The prevailing coexistence of the EEG and emissions trading under the European Trading Scheme (ETS) means that the increased use of renewable energy technologies generally attains no additional emission reductions beyond those achieved by ETS alone. In fact, since the establishment of the ETS in 2005, the EEG’s net climate effect has been equal to zero. While employment projections in the renewable sector convey seemingly impressive prospects for gross job growth, they typically obscure the broader implications for economic welfare by omitting any accounting of off-setting impacts. These impacts include, but are not limited to, job losses from crowding out of cheaper forms of conventional energy generation, indirect impacts on upstream industries, additional job losses from the drain on economic activity precipitated by higher electricity prices, private consumers’ overall loss of purchasing power due to higher electricity prices, and diverting funds from other, possibly more beneficial investment.

Proponents of renewable energies often regard the requirement for more workers to produce a given amount of energy as a benefit, failing to recognize that this lowers the output potential of the economy and is hence counterproductive to net job creation. Significant research shows that initial employment benefits from renewable policies soon turn negative as additional costs are incurred. Trade- and other assumptions in those studies claiming positive employment turn out to be unsupportable.

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.

See full detailed report here.

Icecap Note: This mirrors the findings of Spain and Denmark. The administration points to these countries as models for future US energy reliance on renewables. We should be learning from their experience and NOT TREAD down the same failed paths. Read these stories and write/call or visit your congressman and senators. If they won’t read the 1500 page bills, maybe they will take the time to read these reports and reject their leaders flawed plans for the sake of their constituents and our and their futures.



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