Towards a Re-Orientation of National Energy Policies in the EU? - Germany as a Case Study:
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6. ConclusionsGermany´s energy policy has introduced new elements in the form of phasing-out nuclear energy and of introducing an ecological tax reform. At the core of energy policies in the 1990s is the electricity and gas market. With the share of nuclear energy declining in the long run the import of gas and gas-fired power plants are likely to become more important — creating new opportunities for importing gas from Russia which, however, represents some supply risk due to political uncertainties and economic instabilities (WELFENS, 1999c). Gas imports and electricity imports, respectively, will increase in the long run. There are also prospects for rising German/EU electricity imports from transforming economies in eastern Europe where governments increasingly are aware of the need to combine modernization of the energy sector with requirements of environmental protection; but with respect to individual countries of the Visegrad group there are considerable differences (WELFENS/YARROW, 1997; JASINSKI/SKOCZNY, 1996a and 1996b; JASINSKI /PFAFFENBERGER, 1999; WELFENS/GRAACK/GRINBERG/YARROW, 1999). The gradual liberalization of the EU electricity market and full German liberalization of this market will contribute to rising electricity trade (WELFENS, 1999b). Germany is likely to rely on higher electricity imports on the one hand, while on the other hand, there will be stronger incentives to switch to more energy-efficient power generation, including increasingly combined heat and power generation; the use of renewable energy sources also could play a slightly increased role, although intensified price competition in the context of a liberalized EU electricity market could undermine earlier prospects for a rapid expansion for the share of renewables. As practically the whole stock of fossil power plants will have to be replaced in the period 2000-2030 there is a high potential for combined heat and power plants, and phasing-out nuclear energy could create additional investment needs (PFAFFENBERGER, 1999). Facing falling electricity prices the political will to encourage expansion of combined heat and power plants will remain important for reaching higher energy efficiency in Germany. Since the CO2 emissions (per kWh) from gas fired power plants is only half that of lignite we can expect policy will have to restrict the role of lignite if CO2 emissions reduction targets are to be achieved. Taking into account the goal of phasing out nuclear energy one has to anticipate a strongly increasing German gas demand, which could contribute to higher gas prices in Europe and worldwide. A reduction of CO2 emissions in the electricity sector is possible to some degree with a higher share of natural gas. Phasing out nuclear energy power plants and replacing them by less capital intensive natural gas and coal power plants could contribute to temporary job losses. A greater role for gas, in turn, will mean increasing price risks with respect to changes in the natural gas price. One should also note that Euroland´s current account position would suffer from rising German gas imports. The additional gas imports mainly could come from Russia but also from other countries. Germany and the Community could deliberately use rising gas imports from Russia as a means to stabilize the Russian transformation process. However, if Russia is not adopting adequate internal reform policies — with a strong focus on the rule of law, budgetary and tax reforms plus the creation of a credible and efficient banking system — rising Russian exports of natural gas could mainly result in increasing capital flight and rising Mafia activities undermining the goal of sustainable economic transformation. The ecological tax reform adopted and envisaged in Germany is only partly consistent and adequate with respect to reducing emissions and raising employment. Ecological taxes are not explicitly differentiated according to the CO2 content; the German approach adopted by the red-green coalition in late 1998 thus is in contrast to that in the Netherlands, Denmark and Sweden (SCHLEGELMILCH, 1999). The main problem of a pure ecological tax reform envisaged in Germany — raising energy taxes and reducing social security contributions — is that this strategy lacks a policy element which would offset the growth-reducing effects of the tax reform. Based on a broader theoretical framework which emphasised the need of optimal factor allocation which in turn requires internalization of positive and negative external effects plus reduction of tax-induced distortions a Schumpeterian ecological tax reform is proposed (MEYER/WELFENS, 1999): Part of ecological tax revenues would be used to raise expenditures on research and development — internalizing positive external effects - so that growth is reinforced; about 1/10 of the tax revenue has to be devoted to higher R&D expenditures if a negative growth effect from ecological taxes is to be avoided. From a theoretical point of view raising energy/ CO2 taxes should contribute to internalizing negative external effects. The simulations show that adequate CO2 taxation can help Germany to achieve the Kyoto emission reduction goals. While the parallel reduction of social security contributions together with the simulated output path suggests that about 1 million new jobs could be created by 2010 — going along with efficiency gains due to lower labour tax distortions — it is obvious that a Schumpeterian ecological tax reform can be only part of a broader policy strategy to regain full employment and to strengthen international competitiveness in Germany and the EU, respectively. We recommend that the German government adjusts its ecological tax reform in at least three ways: a) switching from an electricity tax towards an explicit CO2 tax, b) introducing an element of promoting R&D strongly in order to reinforce economic growth and to encourage emission-saving product and process innovations, c) seeking a broader EU consensus on a Schumpeterian ecological tax reform. Moreover, government should base tax rates chosen on adequate scientific analysis so that tax rate is neither excessive nor too low to achieve an internalization of external effects. It is obvious that the scientific basis of modern economic policy in Germany could be improved, the improved efficiency and effectiveness of scientifically based strategies could help government to avoid costly policy pitfalls and reinforce the legitimacy of its reform approach; finally, a consistent and efficient tax reform approach also will facilitate the shoring up broader EU and G-7 support for similar reform strategies — this in turn would make international Cupertino easier. Comprehensive reforms (beyond the ecological tax reform) of the social security system and of labour markets are necessary in Germany (ADDISON/WELFENS, 2000). Taking into account EU growth prospects of 2-2.5% p.a. in the period 2000-2020 Community GDP will increase by more than 50%, while traffic is likely to more than double within the same period so that emission levels and the resource use will increase strongly. Improving energy efficiency therefore will remain a crucial challenge for the EU, particularly in the fields of electricity and heat generation as well as in traffic. In this context an innovation-oriented ecological tax reform could be applied in almost all EU countries yielding high long-term benefits. Except for Sweden where the R&D-GDP ratio had reached 3.9% in 1997 already this ratio was below 3% in all other EU countries — with Italy achieving roughly 1% only which seems to be insufficient for a high wage country with only modest growth but high unemployment. Without further investigation it is unclear how strongly the R&D-GDP ratios should increase in individual EU countries and in the Community respectively; the EU has spent 1.83% of GDP on R&D in 1997 which seems to be inadequate relative to Japan (2.92) and the US (2.79%), especially since the latter has strongly raised its civilian share of R&D in overall R&D expenditures. It remains a challenge for future research to determine more exactly — and on the basis of empirical investigation — the opportunities for an EU-wide ecological tax reform. From a theoretical perspective one may argue that all countries with a high conventional tax burden should raise ecological taxes in order to internalize negative external effects — the broad tax-GDP ratio (sum of direct taxes, indirect taxes and social security contributions as % of GDP: EUROPEAN COMMISSION, 1999, p.19) in all Euroland countries exceeded 40% in 1998 except for Ireland (32.3), Spain (36.9) and Portugal (36.5). It is obvious that an innovation-oriented ecological tax reform could be particularly useful for countries with high unemployment rates, and this holds the more the higher the potential growth prospects for R&D-intensive products in output and exports are. However, one should study more carefully the macroeconomic and sectoral aspects of an EU-wide innovation-oriented ecological tax reform, e.g. based on an adequately extended version of the PANTA-RHEI model with its unique approach of combining input-output analysis, emission modelling, use of R&D capital stocks and standard macroeconomic accounting. Increasing government R&D promotion strongly within a Schumpeterian oriented ecological tax reform — as proposed here - raises several issues, including that of raising the efficiency of government R&D policies in EU countries which are known to suffer from various problems in comparison to the US (WELFENS/AUDRETSCH/ADDISON/GRUPP, 1998). EU countries will have to spend more on R&D and in some cases should specialize more strongly in the innovation race; moreover, new technology fields should be promoted adequately by government R&D policies which mainly require improved conditions for start-up companies and venture capital financing, respectively. Reforming higher education in a way which makes the university system more responsive to the needs of a high technology (and the information services) society also is important. As regards Germany and some other EU countries one could also recommend improving conditions for foreign direct investment inflows since multinational companies´ investment plays a core role in raising R&D intensity. Moreover, strengthening the role of capital markets by a broad social security reform which reinforces voluntary savings for retirement is advisable since broader capital markets would put adequate pressure on managers to adopt adequate innovation strategies which reinforce long-term profitability of the firm. Perspectives A Schumpeterian ecological tax reform could not only bring major benefits for Germany but for the whole EU (it also would be applicable in the US, Canada and Japan). Since in 1997 per capita CO2 emissions of Belgium (12 tons) and the Netherlands (11.8 t) were somewhat higher than in Germany (10.8 t) the benefits of a Schumpeterian ecological tax reform in these two countries could be even higher than in Germany. With British, Italian and French per capita emissions being slightly lower — that 9.4, 7.4 and 6.2 percent, respectively — a Schumpeterian ecological tax reform would also generate considerable benefits in the UK, Italy and France; the latter, of course, faces special problems from its large nuclear power industry. It would be useful to adopt an EU harmonization approach in the field of (Schumpeterian) ecological tax reform, the two main reasons being that some minimum harmonization would avoid distortionary effects on intra-Community trade and foreign direct investment on the one hand, on the other hand taxation of primary energy inputs according to the respective CO2 intensity hardly is possible without an EU-wide approach. Germany´s ecological tax reform should be modified adequately which means both adopting an explicit focus on CO2 emissions of primary energy and splitting the ecological tax revenue in a way which would not only reduce labour costs but also raise R&D promotion and R&D expenditures, respectively. The EU should adopt a Schumpeterian ecological tax reform project, which would generate new jobs, strengthen EU competitiveness and stimulate economic growth. Facing the New World of economic globalization an adequate EU action program could considerably contribute to modernizing the EU and to successfully cope with global warming.
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