Economics and politics - comment and analysis
19. November 2021 I Heiner Flassbeck - Friederike Spiecker I Climate change, Ecology and Growth, Economic Policy, General Politics

Glasgow failed: The way must now be the goal

The climate conference in Glasgow has come to an end without having produced a major breakthrough in climate protection. The politicians who negotiated for two weeks believe they have taken another step in the right direction. Climate activists, on the other hand, are deeply disappointed because they had finally expected concrete action instead of diplomatic declarations. In fact, progress since the Paris Declaration six years ago has been manageable. For example, no clear commitments have been made to reduce coal use on a set timetable, or even to zero. The 1.5-degree target is now even less achievable.

Behind all the climate conferences so far is an overly simplistic view of how the globalized economy and our societies function. It does not work to ask sovereign governments in an international agreement to target the 1.5 degrees by trying and using any measures that seem to do the job from a national point of view. Adding up a hodgepodge of national measures cannot lead to a satisfactory overall result as it does not take into account the fact that all countries are closely interconnected via a huge global network of markets for fossil fuels.

Politics and markets cannot be separated

What one government does is not without impact on the rest of the world. If one government pushes its citizens to abandon fossil fuels very quickly, if nothing else happens, more fossil fuels will be used in other countries simply because they have become cheaper as a result of the one country’s phase-out.

Replacing cheap and relatively readily available energy sources with clean ones based on new know-how and requiring comparatively large capital expenditures is an unprecedented political and economic feat. This may be possible in small and rich countries with a high degree of social cohesion, but for the vast majority of developing and newly industrializing countries it is virtually impossible without massive help from outside. But their participation is essential if there is to be even the slightest chance of limiting global warming to a manageable level. But even for a country as important as the U.S., switching to non-fossil energy means taking a political path that carries high risks for democracy. After all, the country has already had a president who denied the existence of man made climate change.

Massive redistribution within democratic societies equally required …

If the use of the new clean energy becomes more expensive for the individual, such measures cannot be implemented on a broad scale and under democratic conditions as long as no financial compensation is offered to the poorer part of the burdened people. This usually means redistribution in favor of the lower income groups at the expense of the upper ones. If, however, the majority of people listen to influential lobby groups or are even convinced by their neoliberal mantra that a wide spread of income and wealth is the result of economic efficiency and a prerequisite for a positive dynamic development of the economy, the necessary redistribution is already politically unachievable at the national level because there are no democratic majorities for it.

… as internationally, …

This is all the more true in the international context, where a strong redistribution from the rich to the poor countries is urgently needed, but was by no means bindingly agreed upon to a sufficient degree in Glasgow. The beginnings of a German energy turnaround date back more than twenty years, without Germany having significantly reduced its overall CO2 emissions since then. How can one expect developing countries, where maintaining an adequate energy supply to secure a minimum standard of living is a major problem anyway, to be able to accomplish this much more quickly?

Chancellor candidate Olaf Scholz is seriously mistaken when he sees Germany’s international contribution to climate protection primarily in its role (boldly assumed by Scholz) as a technological pioneer. It is by no means enough to show the world that and how Germany can produce in a climate-neutral way and at the same time maintain its own standard of living, even if it were to succeed in the near future, which is highly unlikely. This is certainly not a sufficient condition for successful climate protection worldwide. Even if technological solutions to protect the climate were ready and waiting on the table, it would still not be clear how poorer countries would be able to finance these fabulous technological solutions. Especially since Germany has not been willing to give up its surplus position in international trade for decades. How are highly indebted countries supposed to finance the import of new technologies – even if it is only the know-how for them?

… but unfortunately unrealistic so far

The idea of making the rest of the world happy with German climate protection technology is unabashedly (not to say arrogantly) put forward here. From Scholz’s point of view (and presumably not only from his), this would have the advantage that Germany or its upper class would not have to give up any of its own prosperity, but at the same time could be considered a shining climate protection hero. Scholz ignores the question of financing in this almost populist simplification of the problem. He would have to come clean with the people in this country and explain that the rich nations would not only have to find the technological solutions for climate neutrality first, but would also have to more or less give them away to the poor countries as soon as they had been found, so that they could behave in a climate-neutral manner and still develop positively – quite apart from the colonial aftertaste of this approach.

And this means nothing other than a huge redistribution program from the rich to the poor countries – in the very own interest of the inhabitants of the rich countries. The fact that this problem is neither touched upon by the candidate for chancellor in a current debate on climate protection nor addressed as an exposing sticking point by the climate activists attacking him shows how completely unrealistic it is to even begin to tackle such a redistribution: Some don’t want to hear about it, others are not sufficiently concerned with the economic context.

This is exactly why the transformation of a coal-based energy supply in giant countries like China and India will take a long time, even if it is started immediately. Merely demanding that these and even poorer countries largely skip the coal age on their development path is of no use.

Climate activists must also take note of this if they want to be taken seriously: There is no way in the entire world, especially in democracies, to completely transform the economy and society from one day to the next without jeopardizing what one wants to achieve, namely a politically, socially and societally acceptable way to transform a system that has been based on fossil fuels for 200 years. In the developing countries, it is not only conversion that must be achieved, but conversion together with a further substantial improvement in the standard of living for the great mass of people.

Accusations that not enough and not fast enough action is being taken are understandable. But the climate will not be helped if people start fighting each other in distribution battles resulting from the transformation of the economic framework. The climate damage that is yet to occur and its repair, insofar as it will be possible at all, are the toll – however unequally distributed – that economic illiteracy, democracy and short-term peace are taking.

That it is a race against time is beyond question. For peace naturally comes under threat from the other side, namely the physical side, when food shortages, water shortages and the consequences of extreme weather events in turn exacerbate living conditions. We cannot change physical laws because they are natural, but we can change economic conditions because they are man-made. But without the cohesion of people at the national and international level, the crisis cannot be contained. And to achieve this cohesion, it is not enough to refer to physics.

The path is crucial

In light of this, it should be obvious that national commitments sought through any national instruments are the wrong way to go in a closely interconnected world. Instead, the international community must agree on an international path that leads to a steady reduction in the consumption of fossil fuels, without each national government having to continually rethink how it can achieve this, while at the same time these energy sources are available in large quantities and very cheaply.

This can only be achieved through an international agreement between producers and consumers of fossil energy sources, which amounts to systematically and steadily reducing the supply of fossil energy sources, i.e., reducing the exploitation of these substances more and more. This, too, is undoubtedly a Herculean political task, but one that can be successful in the end.

This agreement must be attractive to both sides, demanders and suppliers alike, so that all major market players agree to it and adhere to it. To this end, the international community must guarantee a price path for oil, coal and gas that ensures two things: It must make the consumption of fossil energy more expensive on an ongoing basis in such a way that this reliably safeguards investments with which consumers try to avoid the consumption of fossil energy (e.g. by converting their heating technology or their means of transportation, right down to the decision where to live and work).

Second, the price path must give fossil energy producers certainty about the revenues they can expect over many years, so they can retool their business models in time before those revenues dry up. If fossil fuel prices rose more than overall consumer prices in the major consumer countries over twenty to thirty years, this would be extremely attractive to producers because they could really plan without being at the mercy of the ups and downs of commodity yields as they have been in the past.

In the consumer countries, there would be strong incentives to invest in the expansion of non-fossil energy sources even without ever new government subsidies, because it is clear that they will pay for themselves at a relatively precisely foreseeable point in time. As soon as the technological changeover is completed, the price guarantee to fossil energy suppliers would no longer apply. Because then no one would ask for these energy sources anymore.

Should the state control prices – or leave them to financial market speculation?

Those who say that such a path for fossil fuel prices is illusory because no one is willing to leverage supply and demand and create “artificial” prices for these important goods should bear in mind that today’s “market prices” in particular have nothing to do with the physical supply and demand of end consumers in very decisive phases. The price of oil in particular, but also the prices of many other important commodities, have been determined by the financial markets in a completely irrational manner time and again for almost twenty years.

Even the most recent gas price distortions (see Figure 1, light green line) are not solely the result of supply shortages, but of speculation on rising gas prices: Hedge funds and other speculators are betting in these markets that gas-fired power plants, as a transitional technology chosen by many governments, will be in high demand in the long run, and so will demand for gas. Therefore, the calculation goes, the price of gas will continue to rise for a long time. And this makes gas an ideal speculative asset.

Figure 1: The development of prices for raw materials as a whole, oil and gas.

Source: IMF

The great commodity boom before and after the financial crisis of 2008/2009 was also clearly driven by speculation (UNCTAD in 2011 has produced a report with very clear empirical evidence on the financialisation of commodity markets). That a new speculative bubble is now forming in the very sector that potentially benefits from climate change policy in the short term is particularly absurd. This discredits the very measure that is most needed, namely a continuous significant price increase due to a shortage of physical supply, but not a price explosion due to speculation.

Anyone who now talks in blanket terms, as the EU Commission does, about burdens on consumers due to price increases caused by shortages of raw materials is completely ignoring the problem of speculation. The Commission claims that “[a]key factor in the current price spikes is primarily that, as a result of the global economic recovery, worldwide demand for energy and especially for gas has increased.” This is not at all plausible. If it were true one-to-one, the slump in the economy last year should have caused gas prices to fall much more sharply.

For the Commission and the governments, it must first of all be a matter of putting speculation of all kinds in check in order to have a meaningful market price at all. If a price increase were clearly due to shortages in the supply of gas, it would make no sense at all to recommend that governments take action against it. In that case, it might only make sense to provide financial relief to poorer households as a whole so that they can cope with higher gas prices, i.e., to provide subject support rather than object support (as shown in the previous article).

However, the current development of gas prices clearly shows how important it is for the international community to reach an agreement on fossil fuel prices. For only if prices develop in a stable and expectable manner can there be a global agreement and effective political compensation measures at the national level for those hit hardest. As long as prices, which are so central to global policy, are formed on speculatively distorted markets, large profits will flow into the pockets of speculators. Then neither consumers nor producers can be expected to understand a strategy of rising prices. Because then the prices do not represent an honest signal of the real scarcity of fossil fuels.