Why CO2 emissions aren’t sinking, in spite of governments’ best efforts

Global CO₂ emissions are rising, although governments around the world are attempting to slow them. Austria has also failed to reach its climate goals. WU Professor Klaus Gugler’s research focuses on current energy policies and their effects on competition. He attributes the problems mainly to misguided subsidization policies and too-low prices for CO₂ certificates.

The climate policies of many countries focus on direct subsidies for renewable energy sources like wind and solar power. Germany alone spent € 30 billion on such subsidies in 2016, without any observable improvement to date. “Governments seem to feel that they can solve the problem by subsidizing the supply side, that is, they think they know which renewable technologies will be able to solve our climate problem,” criticizes Klaus Gugler, head of WU’s Institute for Regulatory Economics. He continues, “Our studies have shown clearly, however, that the effects of the resulting competition force the wrong energy providers out of the market.”

Subsidies with side effects

Gugler’s research work investigates the current situation on the energy market with a microeconomic approach, highlighting the effects of the integration of renewable energy sources on price developments, incentive effects resulting from governmental regulatory measures, and effects on competition. One problematic aspect is that because renewable energy sources are being subsidized, supply has increased, causing prices to drop. “From an economic perspective, it doesn’t make sense to subsidize things that you actually want people to use less of, like energy. Without any indications of scarcity, prices drop and consumption rises,” says the economist. Other side effects, for example continuing power supply reliability risks due to renewable energy sources’ reliance on meteorological conditions, are also not taken into account in current subsidy policies.

CO₂ certificates too cheap

Thermal power plants, which emit CO₂ during power generation, and other CO₂-intensive industries like the steel industry are required to purchase CO₂ certificates entitling them to create these emissions. According to Gugler, however, governments have not managed to charge an adequate price for these allowances due to a lack of international cooperation and the success of lobbyists campaigning for an oversupply of certificates. The low wholesale price of energy removes incentives to invest in more sustainable power sources, he says. “Practical examples for this are easy to find: When used to generate electricity, coal emits at least double the CO₂ as natural gas. But because the CO₂ price is so low, it’s natural gas rather than coal that’s being pushed out of the market by renewables. This means that CO₂ emissions aren’t decreasing, in spite of all the subsidies,” says Gugler.

Prudent investments and taxation

For economist Klaus Gugler, it would make good sense to tax consumers as well as CO2-producing industries. “This is the only way to respond to the increased CO₂ emissions resulting from goods imported from developing countries, and it would also discourage production in countries with lower environmental standards.” He also proposes reducing the number of CO₂ certificates available on the market and setting a minimum price for allowances. “Rather than governmental subsidies for renewable energy sources, I would trust in the market forces as long as the ‘price is right,’ and invest the money in research and development instead. The government should provide a consistent regulatory framework in the energy industry. We don’t know how we’re going to reach the goal, but it certainly won’t be without competitive solutions,” says Gugler.