Germany (University of Munich) “The energy scarcity today could lead to a surfeit of fossil fuel later”
An interview with economist Karen Pittel on the future of energy supply and the global climate.
Karen Pittel is Professor of Economics at LMU. She is also head of the ifo Center for Energy, Climate and Resources. She was a member of the German government’s commission on gas prices.
Is the current energy crisis a threat to or an opportunity for climate policy?
Karen Pittel: It is both. It is an opportunity, because we now have many additional reasons to save energy and invest in renewable energy.
And the crisis poses a threat because we are likely to see CO2 emissions rise in the next two to three years, for example as industry shifts from gas to oil in the short term. In electricity production, too, there are attempts to take more coal-fired power plants back on-line.
And after these two to three years?
What worries me is that more gas deposits and potentially more oil deposits are now once again being tapped all over the world. And these are usually production facilities that run not for two or three years, but for more like ten years or more. In other words, the energy scarcity today could lead to a surfeit of fossil fuel one or two decades from now.
Are there sufficient economic incentives to invest in renewable energy?
In a situation such as the one now, with huge uncertainty about what is going to happen with inflation and jobs, many companies and households alike simply don’t have the confidence to invest in new technologies. This means that capital investment is not really taking place on the scale we would need to see. And the government also needs to invest: There is a lot of infrastructure to be expanded and financed. Yet at the same time, a lot of money is needed right now to help people and businesses weather the crisis
Can Germany achieve greenhouse gas neutrality by 2045?
Technical concepts as to how to make Germany carbon neutral have been around for some time. Why haven’t we made more progress?
Reducing emissions depends on private investment. Ninety percent of gross fixed capital formation is privately funded. The government alone could never come up with that kind of money. What the government can do, however, is create the right conditions and incentives.
From a private perspective, investment must pay dividends – not necessarily overnight, but over the lifetime of the assets. And for that, you need certainty about CO2 pricing, but also about subsidies, for example. Uncertainties about protracted approval processes can be one reason why fewer projects are undertaken. That is true for industrial investors, but also for citizens’ cooperatives and individual investors.
Wind power is frequently cited as an example: If it takes four, five or, in some cases, even seven years to get a wind turbine approved, you not only have slower progress, but investors also get cold feet.
Germany has placed itself under a legal obligation to achieve greenhouse gas neutrality by 2045. Can we do that?
It’s hard to say. You only have to think of all the things that have to be changed. Let us take transport as just one of many examples: To begin with, you’ve got to exchange the entire fleet of private cars, for which you also need the charging infrastructure and all the electricity. Beyond that, if you want to reduce individual private transport overall, you need to offer more in the way of public local and long-distance passenger transport. And this is the comparatively easier part of the transformation. Moreover, trucks with a combustion engine can easily run for 30 or 40 years, which means that we should already have stopped licensing new ones. On top of these challenges there is the transition in air travel, and so on and so forth. And that is just one sector.
We haven’t even talked about the decarbonization of emission-intensive industries such as cement and steel. Although alternative low-emission technologies exist, many of them have not yet been employed at large scale and costs still need to come down to make technologies like green hydrogen competitive. To forecast with certainty that we will achieve climate neutrality by 2045 is not possible, whether or not it is prescribed by law.
Ways to help save gas
Many people are less worried about what happens in 40 or 50 years, but more about how they are going to pay their next gas or electricity bill. Has enough been done on that score?
If the suggestions of the Gas Commission are taken up and are also transferred to the power sector, that alone will be a tremendous help. Even then, though, we will still need to cover for cases of hardship, because the support options at our disposal today often fail to provide support to households where it is most needed. Factors such as the price that households pay for energy and how much they consume are known to gas and electricity providers who are supposed to disburse the relief funds. But they do not know individual income levels of gas or electricity customers. Nor do we know the reasons behind, for example, a high gas bill. Has gas been wasted? Is a house poorly insulated? Or does someone have a pool in their basement? Gas consumption is high not only for the owners of villas with pools, but also, say, for someone who has inherited a large, unrenovated home but who does not earn very much themselves. They, too, will obviously also have a very high gas bill.
And do they get enough support?
The proposed support of households is based on past individual consumption and current prices. That should ease the heaviest burdens. And since people receive this lump-sum payment in any case, even if they consume much less gas than in the previous year, there is still an incentive to save gas.
On the other hand, there is the problem that people do not see what they are consuming now: They only see that when they get the bill months later. So here, it would be good to employ additional tools: something like a gas consumption traffic light, for example – preferably for each household. Red could mean ‘ we are missing the target for gas savings’, and green could mean ‘we are on target’. A sensible target would be the 20% we need to save on average in order to avoid a gas shortage. It would also be important to find small ways to help save gas without having to lower the room temperature, like fitting thermostats or more economical shower heads, for example. There are all kinds of measures for which energy advice could raise awareness.
If no one demands fossil fuels anymore, you can’t sell it
The objective of decarbonization is for countries that have oil and gas deposits to leave these mineral resources in the ground. Can we persuade poorer countries such as Nigeria, Venezuela and Libya to do that?
That is one of the pivotal questions. Every market has two sides to it: demand and supply. If no one demands fossil fuels anymore, you can’t sell it. That is what the EU is trying to achieve: It wants us to switch to different forms of energy so that no one buys fossil fuels anymore. The problem, of course, is whether the rest of the world will play ball.
So far, over a hundred countries have committed themselves to being climate neutral at around the year 2050. However, the policies necessary to achieve this goal are not yet in place in most countries. While I am relatively optimistic as far as the EU is concerned, I am not nearly as optimistic about the global climate targets.
Do poorer countries have alternatives to selling oil and gas?
That is a problem. If you destroy demand for their oil and gas, they still have to survive somehow, so you would need to establish alternative industries and structures. The Gulf states, and Norway too, for example, are channeling revenue from fossil fuel into funds and investing it in all kinds of areas – from industry to education, including universities.
Poorer countries find themselves in a considerably worse situation, however. Many of them depend very heavily on revenue from fossil fuel but do not manage to invest that revenue in forward-looking alternatives. There are many reasons for this, such as poor or lacking institutions.
But do you see a chance that really large volumes of coal, oil and gas could stay in the ground?
Let’s put that another way: If oil, gas and coal don’t stay in the ground, we will in future live on an extremely warm planet. The global temperature might then increase not by three degrees, but by six degrees. Some estimates go even further. And that is not an option.
So, the challenge really lies in getting countries to leave these resources in the ground.