Germany's Pricy Gambit: Will 'Cleantech' Be Next Economic Miracle?

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An international race is underway to provide the most comprehensive support for green energy. There is hardly an economic stimulus program that doesn't contain a green component. The United States plans to invest more than $100 billion in environmental protection, and President Barack Obama wants to spend $11 billion alone to modernize the country's ailing power grid. Even more remarkable than America's green "New Deal," however, is the seriousness with which the rising world power in the Far East is pursuing the issue.

"The Chinese have recognized the problem," British environmental economist Lord Nicholas Stern says approvingly. China is pursuing a special solution. Instead of wasting time in developing technologies where they already lag behind the West, the Chinese are concentrating on new high-tech industries with the goal of becoming world leaders in those fields.

From Ox Carts to Electric Cars

The People's Republic has fared well with this strategy once before. Instead of copying existing video recorders, China went straight to DVD technology. Today, a company called BYD ("Build Your Dreams") is about the make a similar leap -- from the ox cart to the electric car, as it were.

Although it has few car models on display in its showrooms in Shenzen, BYD does pride itself on the many types, shapes and sizes of batteries it manufactures. Batteries are the company's original business, and it now controls close to a third of the world market for mobile phone batteries. Company founder Wang Chuanfu is now using BYD's cumulative expertise in battery production to enter the automobile business. A year ago, he unveiled the F3DM, the world's first mass-market, plug-in hybrid vehicle, to fanfares and showers of confetti. At the time, the company announced plans to sell 10,000 of the new vehicles by the end of the year.

Wang has toned down his rhetoric since then, after having sold only about 100 of the plug-in hybrids. BYD still earns most of its revenue with conventional gas-guzzlers, because China lacks the necessary infrastructure to allow users of plug-in hybrids to fill up their batteries. Besides, the vehicle's reliability has been called into question.

Wang, whose personal fortune of $5.8 billion makes him China's richest man, expects more assistance from Beijing, but the government has been hesitant. It currently provides a subsidy of at least €4,900 for each purchase of a so-called new energy vehicle. But Beijing is concerned that by offering even higher subsidies, it would be involuntarily supporting foreign competitors like Toyota, with its Prius hybrid model. The Chinese know that market leadership cannot be bought in the long term.

This is the crux of green industrial policy, in Asia and Europe alike: Expensive, dramatic projects are often given preference over alternatives that may not be as flashy, but are far more effective in avoiding greenhouse gas emissions.

At any rate, photovoltaics is by far the most expensive method. It costs more than €600 to reduce CO2 emissions by one ton. For wind energy, that cost is reduced to about €100 per ton. It would be more worthwhile to improve the efficiency of brown coal power plants, for example. According to a study by the McKinsey consulting firm, that would cost less than €20 per ton. In other words, the money that is spent to save one ton of CO2 with solar power could be used to save up to 30 tons in coal-fired power plants.

'Economic Horseplay'

Another inexpensive way to avoid emissions is for the owners of single-family homes to insulate their roofs and replace windows. Under very favorable circumstances, the investment can even pay for itself. According to a study by the Stuttgart Institute of Energy Economics and the Rational Use of Energy, this approach could save up to €150 for each ton of CO2 not emitted into the atmosphere. However, such efficient but unglamorous methods encounter relatively little political support.

"The more inefficient the generation of renewable energy is, the higher the subsidy," says the Kronberg Circle, a group of liberal economists, commenting on what it views as the government's faulty incentive policies. "This is economic horseplay."

Particularly paradoxical is the fact that the amounts of carbon dioxide saved with solar power contribute to reducing the price of CO2 pollution rights. The going rate for emissions certificates on the European Energy Exchange, based in Leipzig, Germany, is €13.40 per ton. Ironically, solar subsidies reduce the incentive for operators of conventional coal-fired power plants to invest in clean coal technology, because it's cheaper for the plants to buy certificates.

In light of these gross defects in the system, economists advocate a fundamental reversal. Instead of the government investing billions in relatively uncompetitive technologies, they want to see it stipulate a uniform price for CO2 emissions, with the help of a carbon tax or the auctioning of pollution certificates. This would allow every business and every household to find the best approach to reducing its greenhouse gas emissions, and the most efficient emissions avoidance method would automatically be applied.

'No Better than East Germany's Central Planning System'

Instead, politicians are dabbling in micro-management. As an example of the painstaking detail found in the EEG law, offshore wind farms that are installed more than 12 miles off the coast receive six months of additional subsides per nautical mile after 12 years, and additional subsidies are paid for 1.7 months for each meter of water depth, but only to a depth of 20 meters. Companies whose wind farms go into operation before 2016 also receive a bonus for fast action.

The upshot of this interventionist policy is "no better than what East Germany achieved with its central planning system," says economist Hans-Werner Sinn, head of the Munich-based Ifo Institute for Economic Research.

In the end, the fight against climate change sends mixes messages to German businesses. On the one hand, it offers industry, particularly the machine tool and plant engineering industry, the opportunity to achieve past export successes with innovative products, and the economy is rejuvenated in the process. On the other hand, the subsidization of renewable sources of energy threatens to become an enormously costly experiment.

Felix Hess, the Güstrow biogas entrepreneur, is trying to eliminate his dependence on government support as quickly as possible. However, he is still a few cents from his goal. Natural gas from Russian wells currently costs less than 3 cents per kilowatt hour, while his biogas from the fields of Mecklenburg is only profitable at prices of 8.5 cents or higher.

However, it is also important to consider the benefits, says Hess. Take, for example, the effects of his business providing 60 jobs in a structurally weak region. Another benefit of his business, he says, is that it reduces dependency on Russian suppliers. "I'd rather be dealing with Mecklenburg farmers," says Hess.

For that reason, according to Hess, the government cannot avoid addressing the cardinal question in its climate policy: "What is the effort worth to us?"

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• Part 1: Will 'Cleantech' Be Next Economic Miracle?
• Part 2: Memo to Companies: Change or Die
• Part 3: The International Green Energy Race