A Tale of Two Energy Policies: Germany vs. UK

Some people have recently pointed out that one of the many adverse effects of Brexit is the fact that it makes it much harder for the European Union to hit its carbon emissions target. The reason is that the United Kingdom has the lowest per-capita emissions of carbon dioxide in the EU. So if the UK falls out of the EU statistics and the target doesn’t get adjusted, other EU countries will have to step up their emission reduction efforts.

This is, of course, more a problem of political symbolism than a substantial one: If member states thought that their pre-Brexit climate policies balanced the cost and benefits of emission reduction, then why should Brexit make a difference? What matters for the greenhouse effect, after all, are global emissions.

But one might ask: how come the UK is the “green poster child” of Europe? What are they doing differently? Here I find it instructive to compare the UK to Germany.

As is well-known, Germany has embarked on an ambitious policy of “energy transition” (Energiewende) which consists of a combination of subsidies for renewables and legally mandated targets for fossil energy production. (For reasons that don’t really make sense except to those living in the bubble of German public opinion, they also see their shutting down nuclear power plants as a part of the green energy transition.) The question of how fast the government should shut down coal plants, and other aspects of the energy transition, are hotly debated issues in Germany.

The UK has taken a different approach. Rather than trying to regulate the energy mix directly, the British government decided to use the price mechanism: they implemented a special tax to create a price floor for EU emission certificates which British energy producers need to buy. The price floor increases every year according to a fixed formula, ensuring that the cost to energy producers of emitting carbon dioxide in the UK has been substantially higher than in the rest of the EU throughout the last decade.

OK. So how did the UK do compared to Germany?

Pretty impressive. True, the UK’s per-capita emissions were lower than Germany’s to begin with. But Germany has cut their emissions by 12% over the last decade, while the UK cut theirs by 33%!

What about the energy mix?

The UK started from a renewable share of only 1.6% in 2007. Now it’s 11%. By contrast, during the same time, Germany went from about 10% to 16.5%. That, too, is a pretty impressive difference.

But didn’t the UK policy lead to much higher energy prices for consumers?

Nope. In fact, energy is considerably cheaper in the UK than in Germany. One kilowatt-hour of energy costs only about 18 euro cents in the UK (accounting for purchasing power differences and including all taxes) compared to 29 euro cents in Germany.

I call this a big win for Pigou taxes as opposed to direct regulation.

(Ceterum censeo: I still think the demand side is the wrong side. Effective climate policy must restrict the supply of fossil fuel!)

Addendum: Patrick Mellacher wants me to include the size of the industrial sector in my comparison. I’m happy to oblige him. Of course, the industrial sector is smaller in the UK compared to Germany. But that only explains why the level of emissions per capita is lower in the UK, not why the decrease in emissions was larger. It doesn’t seem like the industrial sector has changed in size (compared to the economy as a whole):

Intro to Econ: Eleventh Lecture Aside – Why don’t we have a global carbon tax?

If I understood it correctly, we are currently experiencing climate change, climate change is believed to be detrimental to most people, and climate change is to a large extent due to human activity, especially those activities that release CO2 and similar gases into the atmosphere. Moreover climate change is a global problem. Any CO2 released by people’s activities in Asia, this (supposedly mostly negatively) affects not only people in Asia, but also in South and North America, Africa, Australia, Europe, in fact everyone living on this planet. In other words, using the language of a previous post, climate change is a global negative externality of any economic activity that (directly or indirectly) releases CO2 (or similar gases) into the atmosphere.

In the last post I argued that such negative externality problems (that the market typically does not solve because of the logic explained in the advertising example) can often be solved by setting appropriate taxes on the offending (negative externality producing) products. I also argued that one would probably expect that a voting process will in fact lead to a country adopting such taxes. Can’t we just use a similar approach to solve the global climate crisis? I will here explain why this is not so easy.

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Intro to Econ: Eleventh Lecture – Solutions to Negative Externalities through Taxation

In a previous post I explained why an economic activity that causes negative externalities (some form of harm for others) tend to be done “too much” in a market. With “too much” I mean that, without any other measures in place, the market will not generate a Pareto-efficient situation. Sometimes this is called a “market failure”. In this post and the next one I explain how we can deal with such situations and why this is easy in some cases and rather difficult in others.

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Intro to Econ: Eleventh Lecture Aside – Advertising Bans on Cigarettes and Alcohol

In the previous post I explained why it may well be in some cases that companies advertise too much for their common good. I used it primarily as an example to illustrate how the presence of negative externalities can lead to too much of the activity that causes the negative externality (such as driving cars, et cetera). I here just want to point out an interesting direct implication of the advertising example I gave.

In recent years there was a fairly effective campaign in many countries in the world to reduce smoking (which by the way is almost certainly an activity with negative externalities). This was achieved by a mix of policy measures. These included education about the serious consequences about smoking (“you will die soon and horribly” written on the package together with gruesome pictures), banning smoking from many public places, significant price increases (more about this later), as well as advertising bans. Similar measures are now considered in at least the EU to reduce alcohol consumption, which is also often seen as creating negative externalities.

I certainly believe that price increases are effective to reduce the consumption of cigarettes and alcohol. I also believe that enforced bans on smoking or drinking (enforced with fines or prison time) will be effective even if the enforcement is perhaps not always necessarily proportional to the “crime”. A little bit beside the point: I have the feeling that the “education” is not very effective, but I may well be wrong about this.

But the main point I want to raise is this: I have heard the argument that advertising does not so much affect how much people smoke or drink but mostly only what they smoke or drink. If this is true then a ban on advertising will, by the logic of the previous post, only help to raise profits for the cigarette and alcohol producers, without any effect on smoking and drinking levels.

It would be interesting to assess empirically whether this is true or not. This is probably not so easy, as in many countries many policy measures were put in place at the same time, so it is hard to know which of them was effective. This does not mean that a clever empirical design could not address this, though.

Intro to Econ: Eleventh Lecture – Negative Externalities

On Austrian highways you can sometimes find a sign that says “Schnell ist laut!” or “Fast is loud!” in English. The caricature of Homo Economicus (the rational person, often interpreted as highly self-centered) upon reading this would probably react by thinking “Thank you for the warning. But it is no problem. I can just turn up the radio.”

I guess that this is not the reaction that people who placed the sign there were looking for. And I also guess that most people understand perfectly what this sign is asking them to do: Drive more slowly, so that others, i.e., those who live here, don’t have to suffer so much from the noise that you otherwise create. Whether or not this sign makes them slow down is yet another question.

In economic terms, when you drive fast you create an “externality”, in this case harm, to other people not involved in your decision or activity. In this post I want to consider what happens when economic activity imposes negative externalities on others. We will see that this creates problems to the extent that market allocations are no longer even Pareto efficient (recall this post). Continue reading

Intro to Econ: Tenth Lecture Aside – Equal Opportunities

In this post I want to use the model and insight of the previous post to talk about equal opportunities. With this I mean the idea that everyone has the same access to education. I will argue that it is not for fairness but for efficiency reasons why a social planner might prefer a world with equal opportunities. I should also add that this post is a bit fanciful and one could possibly disagree with the way the argument goes. Take it with a grain of salt.

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Intro to Econ: Tenth Lecture – The Job Market

There are many ways we can think about the job market. I believe that I said it before that we should build a model of whatever we are studying only after we specify what exactly we are interested in. And when it comes to the job market there are many things we might be interested in. For instance, we could be especially interested in unemployment: What determines whether someone is unemployed? What consequences does unemployment have for other family members? How do unemployed people find a job again? We could also be especially interested in how many members of a household work and how much and how this is decided at the household level. Why do some people work full time and some part time? We could also be especially interested in how people prepare themselves for the job market. How do people decide which career path to choose? How do they decide what to learn? There are so many things we could be interested in and I believe that each different question will need its own model, where one focuses on the salient features of the job market for that particular question.

In this post I am perhaps being a bit eclectic but I want to think about which person gets which job. That is, I want to think about how the job market allocates people to jobs.

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