ECO FOR THE ECONOMY MEANS SUCCESS
Complaints by European industry lobbyists’ is that energy costs are putting them at a “destructive” competitive disadvantage simply doesn’t stand up to scrutiny. Industry lobbyists will say either that the costs of labour are too high, or that their big problem is the price of energy. America’s historically low gas prices are at present the cause of yet more European moaning.
But it’s a lament that rarely holds up under examination of the facts. All too often, these complaints are part of a lobbying campaign that is essentially political. And when that’s not the case, we usually find there’s a lot of money at stake in industries that are reluctant to invest in adjusting to future challenges. And even when corporate leaders know that these investments are necessary, a majority of them still believe the cost should be paid by the taxpayer. That leads them to threaten using their deadliest weapon, the threat of job cuts and the relocation abroad of their factories and production operations.
The facts show how wrong they are. Energy costs account on average for less than 3% of gross production costs in Germany, whereas staffing costs account for about 20%. Even if you look at shares of gross value creation, the energy costs don’t exceed the 10% mark. Yet, industrial lobbies and trade associations continue to prophesy the end of the Western world.
“The real risks to competitiveness lie elsewhere. All of Europe is dependent on fossil fuel imports, and not just from Russia”
People, especially in Germany, like to hold the costs of the ambitious transformation of our energy system – the“Energiewende” – responsible for rising energy prices. This is mainly in relation to electricity prices, as oil is traded globally and the oil price for companies, say, in America is structured identically.
But the price of electricity for industry in countries like Germany has actually decreased in recent years. Electricity prices at the EEX energy exchange in Leipzig are now at their lowest point for eight years. This can be attributed mainly to the huge expansion of renewables, and also to the surplus of cheap coal-fired electricity, which in turn is causing CO2 emissions to soar, along with the costs of unchecked climate change.
Apologists for waning industrial competitiveness fall silent once a closer look is taken at the current account balance of payments. For years, praise for Germany as the world’s export champion has been just as loud as complaints that industry’s electricity prices are too high. Of course, the two don’t add up. Compared to the rest of the EU, Germany’s electricity prices have always been slightly higher, but this hasn’t stopped us from chalking up economic growth and trade surpluses, while also hugely reducing energy intensity and primary energy consumption by more than 35% over the last 25 years.
“If we continue burning coal, oil and gas for as long as it remains affordable, then we can kiss our climate goodbye”
The German Institute for Economic Research (DIW) has rightly pointed out that once again Germany has disproved the theory that “low energy prices equal reindustrialisation”. In spite of slightly higher comparative industrial electricity prices, the Federal Republic of Germany has for several years being seeing reindustrialisation. The driving forces behind this are chiefly efficient environmental and renewable energy technologies. Looking at Europe as a whole, 2013 was the year when the eurozone had the largest current account surpluses since 1997.
The industry lobby nevertheless continues to complain, largely because of developments in the U.S. energy market. The U.S. may have been able to curb energy prices through the aggressive exploitation of shale gas reserves, but for society as a whole, the effect of those efforts when measured in terms of the environmental aftermath and the failure to modernise, has been horrifyingly negative.
It now looks as if the real reason behind the lobbying campaign by various industries is the upcoming decision on what targets to set for Europe’s post-2020 CO2 emissions reduction, even though these are unlikely to be very ambitious. Instead of a 40% decrease, the bare minimum should be a 55% reduction in the EU by 2030 if we want to uphold the 2°C target. But this isn’t looking promising, and doubtless we will have to foot the bill for this lack of resolve in a few years’ time.
The real risks to competitiveness lie elsewhere. All of Europe is dependent on fossil fuel imports, and not just from Russia. Every year, Europe imports €.5 trillion worth of coal, oil and gas, along with uranium. Some 84% of the oil used in the EU is from outside of its borders, and for uranium, the figure is 100%, of which a fifth comes from Russia. For natural gas, the import figure is 45%.
The European Union is thus indulging in a prosperity transfer of absurd proportions. This dependency is a real challenge, especially as Europe’s scope for diplomatic action in its dealings with Russia proved to be very limited when it came to the breach of international law in Ukraine. Europe’s sovereignty is endangered by its staggering reliance on imports, and it is certainly not in the interest of industries to be reliant for their energy upon unreliable partners. If we want to break away, though, we must try to counteract our import dependence. One proposed solution is hydraulic fracturing or “fracking” of shale for gas, but it’s a particularly dubious idea, and not just from an environmental viewpoint. It is not an option for Europe, and to suggest that a battle with the U.S. over energy prices can be won by increasing the exploitation of Western Europe’s fossil reserves is very naive.
The key issue at hand isn’t the availability of fossil fuels; adequate energy supplies are still available, with many yet to be discovered, so we can, if we choose, continue down the misguided path of fossil-based production and energy supply for another 100 years or so without seeing an exorbitant price explosion. The environmental problem is a far more serious one. If we continue burning coal, oil and gas for as long as it remains affordable, then we can kiss our climate goodbye.
The true limit in using finite natural resources doesn’t lie in their availability. It lies in the fact that extracting, using and burning them is causing catastrophic environmental damage worldwide. If you convert the 2°C climate protection target into quantities of CO2 that we can still actually emit globally, you have a “budget” of around 800 gigatons. Put simply, from that standpoint not even half of the reserves of oil, gas and coal which could be extracted today can even be burnt.
We must counter the battle cry of Tea Party activists in the U.S. of “Drill, Baby, Drill” with a counter-cry of “Chill, Baby, Chill”! Leave the stuff where it is; underground. On top of this, there are other natural resources whose use and extraction also relate to the climate crisis. Producing and processing steel, cement, paper, plastic and aluminium, accounts for around half of industrial CO2 emissions. Unconventional extraction of oil and gas is ecologically harmful for many other reasons as well. It consumes far more energy and water than conventional extraction, and it damages the environment and groundwater at the site of extraction. Oil sands extraction in Canada accounts for 40% of Canadian CO2 emissions, with fracking also consuming huge quantities of water.
Mining, which is sharply increasing around the world, is generally connected with destruction of the countryside, the production of slag and waste, and energy and water consumption. Air is polluted, soil contaminated, forests axed, seas contaminated by deep-sea drilling, countryside destroyed by opencast mines. This isn’t the worst dependency, because for a host of resources just a few countries, sometimes only one, control the market. The Democratic Republic of Congo, for instance, supplies around half of the cobalt extracted worldwide, that we need for batteries, smartphones or electric cars. The working conditions there are life-threatening and exploitative, so we cannot import this resource with a clear conscience.
“The expansion of renewables will stabilise electricity prices, increase security of supply and lower the downstream costs of climate change and high-risk technologies like nuclear power”
The American focus solely on increasing the gas supply will not solve any problems for Europe; at best it delays them by a few years. Worse, it results in increased energy consumption and at the same time reduces the incentives for energy efficiency and energy savings. Right now, a temporary increase in supply from the U.S. as the future main gas exporter could exert downward pressure on world gas prices, including in Europe, but in the medium-term, the upshot will be a greater thirst for energy. In any case, quenching energy demands will not be easy, while rising CO2 emissions will exacerbate climate change on an ever more massive scale. It should be clear that the U.S. hasn’t found a solution, but instead another global time bomb.
The answer to the challenges facing Europe’s competitiveness can be summed up in four steps. First, the expansion of renewables will stabilise electricity prices, increase security of supply and lower the downstream costs of climate change and high-risk technologies like nuclear power. And, second, by raising energy efficiency we will lower the already relatively low share of gross production costs that result from energy costs, and we’ll be leveraging our technological edge systematically to expand Europe’s market position.
Third, significant savings can come from modernising buildings to make them more energy efficient, and by reducing vehicle energy consumption. As well as these savings, there are huge investment possibilities, especially for medium-sized enterprises, and there are also innovation possibilities for Europe’s carmakers. Finally, the need to become less dependent on energy imports is clear. That would keep value-added inside the EU, and do much to bring about the stable prices, reliable overall conditions and technological innovation that industry has been calling for. These are the real competitiveness factors.
Photo credit: iene.eu