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Klaus Gugler

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Klaus Gugler

Researcher of the Month

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.