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The power of truth in costsWhy Germany should dare to go it alone

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The power of truth in costsWhy Germany should dare to go it alone

A single country that tries to reduce its CO2 emissions using today’s standard policy approaches has very high costs but little influence on global climate change. That is why some voices in Germany are warning against going it alone in climate policy. They demand, Climate protection measures should only be carried out together with as many countries as possible within the framework of a climate club and imports from non-club countries should be subject to a climate tariff.

We advise against this strategy. Instead, Germany should dare to go it alone – but do it right! A successful solo effort requires the consistent implementation of true cost truth instead of the previous counterproductive climate policy regulations, bans and subsidies. If costs are true, Germany could reduce its emissions more and more cheaply and realize growth potential, which would convince other countries to follow suit.

True cost truth works

Real cost truth includes three things:

1. Price greenhouse gases: The net costs caused by today’s greenhouse gas emissions must be estimated on a scientific basis and invoiced to the emitters without exception through an explicit CO2 price. This would give all consumers and producers the right incentives to reduce emissions and develop environmentally friendly technologies. When calculating the optimal price, it must be taken into account that greenhouse gas emissions accumulate and have an effect over a very long time, that their reduction becomes cheaper over the years thanks to technological progress, and that the higher the expected CO2 price, the faster the latter occurs. That sounds complicated, but it is easier than optimally designing a large number of bans and regulations and correctly identifying and subsidizing the best future technologies. According to Nobel Prize winner William D. Nordhaus, the current estimates of an optimal CO2 price are around 50-55 euros per ton of CO2. Taking domestic production and energy consumption into account, this corresponds to gross costs of around 450 euros per citizen per year. In order to ensure sustainable costs, a moderate, steady increase to around 130 euros (plus inflation adjustment) per tonne of CO2 would be necessary by 2050, but with much smaller emissions.

2. Relieve work: True cost truth requires that the revenue generated by the carbon price be returned to citizens. CO2 is created during the production and consumption of goods and services. As a result, there is a close connection between individual income, consumption and CO2 emissions. In this respect, CO2 prices are indirect taxes on income and consumption, reduce the real income of citizens and, in addition to their positive incentives to reduce emissions, unfortunately create negative incentives for performance. It therefore makes sense to repatriate the income from the CO2 price by reducing taxes that are harmful to performance, especially income tax. By returning it to citizens through tax cuts, output remains taxed at the same level, but greenhouse gas emissions receive the right price and therefore become smaller.

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3. Reduce bureaucracy: Ultimately, the current climate policy regulations and subsidies can be largely abolished. Because if the costs are true with an optimal CO2 price, they are superfluous. This creates enormous relief potential. Citizens, business and the state would benefit from the resulting reduction in bureaucracy. Regulations and subsidies are currently causing huge costs. In addition, specialists who are currently employed in business and administration with the implementation and control of climate regulations could be used for much more productive activities in companies and administrations.

It is true that optimal CO2 prices are difficult to estimate and their climate impact depends on many assumptions, in particular whether other countries follow suit. But this is even more true of all other policy interventions once their benefits and costs are seriously weighed. Bans and requirements cause high welfare and bureaucratic costs, and subsidies must be financed. The essential point is: With real cost truth, there is far more climate protection per euro invested and the probability that more and more countries will follow suit is far greater than with previous measures.

Germany’s chance

Why should Germany of all countries dare to go it alone? In fact, important representatives of cost truth demand something like this Economists‘ statement on carbon dividends from over 3,600 US economists and 28 Nobel Prize winners as well as the Climate Leadership Council In the USA, the CO2 price should be raised together with as many countries as possible as part of a climate club and imports from non-club countries should be burdened with a climate tariff. But be careful: these recommendations are strongly tailored to the problems of the USA. The USA has far higher inequality, far lower taxes and far fewer climate policy requirements than Germany. That’s why the economists are calling for a per capita return and want to prevent the USA’s competitive position from deteriorating by obliging other countries in the climate club to adopt a similar policy.

Germany has other problems. In order to keep up with international competition and maintain its prosperity, it must urgently prevent additional tax burdens on performance. At the same time, it is pursuing what is probably the most expensive energy and climate policy in the world. Changing this policy to real cost truth therefore does not bring additional costs to the economy, but rather relief. This means that true costs would be easily affordable for the German economy and, in contrast to the current climate policy envisaged by the government, would not create any incentives for further production relocations, but would instead make Germany more attractive as a location. Climate policy with real costs would thus become an important element of an effective revitalization of the German successful model. A commitment by the government to real cost truths and a clearly structured reform roadmap would strengthen its credibility, which it urgently needs for the many other upcoming reforms.

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A notice: A slightly modified version of this article appeared in the Frankfurter Allgemeine Zeitung on September 21, 2023

University of Freiburg/Switzerland
University of Bayreuth

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