German Government Distorts IPCC Report on Subsidies

The Global Warming Policy Foundation (GWPF) has caught the German government distorting the latest IPCC’s report on the effectiveness of “green” energy subsidies. The whole episode is just another example of how broken the IPCC process is. When it suits a group’s policy desires, they will quote from the IPCC. When the peer-reviewed science doesn’t support their desired positions, well, they’ll simply report the exact opposite—and still claim “the consensus” on their side.

The standard position of economists who work on climate change policy is that if one thinks that greenhouse gas emissions pose a “negative externality” deserving of some type of government response, then a carbon tax or cap-and-trade scheme will “internalize the externality” and market forces will take care of the rest. Now to be clear, there are problems with such an approach—the current author has published an extensive critique of this standard case for a carbon tax. But the point is, the default position among economists on this issue is that if you have a carbon tax or cap and trade system in place, then further interventions such as energy subsidies are completely useless.

This is what the IPCC reported, in its latest update. The GWPF blog post makes this point when it writes:

In its report the IPCC emphasises the futility of subsidies for renewable energy parallel to an emissions trading system: “The addition of a CO2 reduction policy to a second policy does not necessarily lead to greater CO2 reductions,” it says in a literal translation of the IPCC’s Technical Summary: “In an emissions trading scheme with a sufficiently stringent cap other measures such as subsidising renewable energy have no further influence on total CO2 emissions.”

Thus, the IPCC now confirms what the Scientific Advisory Board of the Federal Ministry of Economics, the Monopolies Commission or the President of the Ifo Institute, Hans -Werner Sinn, have been saying for years: Under the fixed cap of European emissions trading with its precisely calculated amount of pollution rights renewable energy subsidies only lead to a shift of CO2 emissions, but not to their reduction.

To reiterate, we do not agree that a European emissions trading scheme is good policy, but we recognize the standard economic point that if you have such a system up and running, then it makes no sense whatsoever to supplement it with government subsidies for “green” energy. No, one of the ostensible virtues of a carbon tax or a cap-and-trade system is that they are “market-based” solutions, which allow governments to address climate change in a flexible way, rather than imposing a top-down solution of picking winners and losers.

Yet that’s not the message the German government wants to convey, because it has plenty of vested interests who enjoy subsidies. So what did it do, in light of the awkward IPCC position? It simply reversed what the IPCC said, as the GWPF blog post explains:

Yet the IPCC’s clear verdict regarding the climate-political futility of green energy subsidies that run simultaneously to emissions trading does not appear in the German [government’s] summary. The only comment on this issue reads completely differently: “Emissions trading affects the impact of others measures, unless the number of allowed certificates are adjusted flexibly.”

The difference is obvious: the IPCC has declared CO2 emissions trading to be an effective instrument that makes subsidies for renewable energy unnecessary. The German [government’s] translation reverses this conclusion and makes emissions trading the culprit that allegedly “constricts the impact of other measures.”

This episode beautifully illustrates what the Heritage Foundation’s David Kreutzer explained at a carbon tax conference last summer: Governments cannot be trusted to “phase out” other anti-carbon policies, if only they could get a carbon tax or cap-and-trade scheme. This is a false promise made by the advocates of such schemes, either because they are naïve or because they have no problem bending the truth to achieve their political objectives.

We have the real-world example of Australia: When it imposed a carbon tax, its government didn’t abolish other types of interventions. Many of the most vociferous supporters of a carbon tax (or cap-and-trade scheme) have no intention of getting rid of gasoline taxes, power plant mandates, renewable fuel standards, or fuel economy standards. The German government’s recent chicanery with the IPCC report is just further evidence of this pattern.

No genuine fan of the free market should ever be fooled into “holding his nose” and supporting a tax or cap on carbon emissions, thinking that it will be part of a bargain that eliminates other interventions. On the contrary, we will just end up with the worst of both worlds: top-down planning of winners and losers, in addition to extra taxes.

IER Senior Economist Robert Murphy authored this post.

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