Economics Update September 2023 - Subventionen helfen nicht gegen eine Strukturkrise

The debate about the sense or nonsense of a subsidized industrial electricity price continues; it is also necessary in view of the importance of the project. What should we make of the idea and what alternatives are available?

An industrial electricity price distorts competition

The industrial electricity price is intended to protect energy-intensive companies in particular, which have to compete internationally. This must be countered by the fact that state intervention not only eliminates the price signal and thus reduces the incentive to search for innovations. More favorable electricity prices for selected energy-intensive companies also lead to a distortion of competition between small and medium-sized enterprises and industry. One of the elementary regulatory principles is that the same framework conditions should apply to all companies and not more or less arbitrarily favor selected industries or even individual companies. In any case, subsidizing the price of electricity for individual sectors has the effect of preserving structures. Of course, it would be conceivable to improve the general framework conditions for the economy by reducing or completely abolishing the electricity tax, which after all accounts for about 16 percent of the electricity price, for all consumers. A reduced VAT rate would also be conceivable. It seems strange that this is not being discussed at all.

Subsidies threaten to become entrenched

The argument that such a subsidy is needed for a transitional period of a few years until the price of electricity falls to a very low level of its own accord as a result of the expansion of renewable energies is also unconvincing. The fairy-tale world of low electricity prices from solar and wind power may never be achieved, because even after 2030 the investments in the distribution grids and, above all, the high outlay for storage or for replacement capacities will have to be financed, and the electricity price will therefore by no means be at the low level of pure generation costs. There is therefore a considerable risk that what was after all a "transitional" aid worth billions will become a permanent subsidy that will burden the state budget and reduce the scope for other projects.

The plan to promote the conversion of individual companies to alternative energy sources, which has also already been discussed, would have to be assessed differently. This would be justified by the argument that the use of (green) hydrogen, for example, is too expensive and uncompetitive for the time being and would therefore not take place without state support. Such support would thus be a direct contribution to achieving climate protection targets more quickly, with the positive side effect of preserving jobs.

Structural crisis calls for fundamental improvement of framework conditions

The German economy is facing a profound structural crisis. Its causes are partly externally forced, keyword de-globalization. But they also result from disruptive breaks in previous showcase industries such as the automotive industry and from the politically desired goal of climate neutrality by 2045. The task of economic policy must therefore be to accompany this structural change by facilitating the adaptation of companies through appropriate framework conditions that are advantageous in global competition. What needs to be done is well known: The list ranges from tax relief to a radical reduction in bureaucracy, a very significant shortening of approval procedures, the energetic advancement of digitization in state administration, and the effective promotion of research and education. The fact that the government is actually already celebrating itself for eliminating reporting requirements for hotels is a less than hopeful sign that the situation obviously has to get worse before there is the courage to take a really big step.