Germany’s stubborn coal industry

Paula writes*

It was with relief and a good dose of surprise that the news was heard in January: Germany will achieve its targeted emission limits for 2020. Although this previously seemed out of reach, the COVID-19 pandemic allowed emissions to be reduced by 42.3%. But this is not enough. It has been long known that coal must be phased out to mitigate climate change and meet the 2015 Paris promise of keeping global warming below 2 degrees.

Germany is the largest producer of coal in Europe (see image). The energy sector constituted the largest share of CO2 emissions in 2018, with 34% of energy gained through coal in 2017. In 2020, the government announced the coal phase-out by 2038. It will be driven by increasing CO2 prices and state-ordered shutdowns of coal-fired powerplants.

Moreover, it has recently become obvious that even from a purely economic point of view, the coal industry is ceasing to be profitable. This is mostly due to negative externalities caused by extensive greenhouse gas emissions. As CO2 emissions have been quantified and monetized by the EU’s Emission Trade System (ETS), production costs of coal energy will steadily increase. Additionally, the increasing competitiveness of renewable energies has resulted in lower electricity prices and hence decreasing market share for coal. Lignite mining will be economically unprofitable by 2030.

To compensate for possible financial losses of the industry, the government will pay more than 4 billion euros to two of the biggest energy firms, RWE and LEAG. However, this amount appears to be €1.9 billion more than the firms realistically need to finance the transition. Moreover, despite the grim outlooks for the industry, RWE – the biggest producer of CO2 in Europe – is still deforesting areas and relocating villages to expand coal powerplants. This brings up the question of the role and interests of big energy firms in the coal-phase out.

According to economic theory, inefficient firms should be eliminated under perfect competition as new firms enter the market and compete for profits in the long run. Thereby, resources are allocated to the most efficient producers. This theory does not hold in Germany, where the energy market has an oligopolistic structure, allowing big firms to keep producing despite cost disadvantages. One source of such imperfect competition can be lobbying and bribe-paying. A major lobbyist against the coal phase-out has been the “Wirtschaftsrat” (an association representing the interests of 12.000 businesses) – known for its proximity to the CDU, which is in the ruling coalition. More specifically, RWE’s close relationship to CDU politicians has given the company significant political influence, such as in the commission on energy-policy.

The interests of big energy firms run against the public interest when it comes to Germany’s coal phase-out. Firms want to avoid losses and stranded assets by producing as long as possible. The “public interest” does not automatically mean pursuing sustainability goals, but it does mean allocating resources (including labor) to future-proof industries, reducing emissions, promoting ‘clean’ energies, and facilitating job transitions.

Bottom Line: The market power of Germany’s big energy firms allows them to sustain inefficient production against the public interest.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

2 thoughts on “Germany’s stubborn coal industry”

  1. Dear Paula,
    this article hits close to home as I myself am German and have mostly grown up near or in former/current coal regions. The remnants of the coals and steel era are apparent in these regions’ architecture and many more aspects. Relating specifically to your discussion. The growing diseconomies of scale of coal have been evident and driven seemingly not only by the substitution of these energy sources with alternatives, but also relatively competitive countries (in this industry) in the form of Poland and the Czech Republic. This might be worthwhile exploring as a topic. Especially as the transition of coal to other sources carries endless amount of political and social considerations (of which you likely are aware of). This can be seen for example in the prolonging of the production mandate of the Turów coal plant until 2044. Furthermore, while I am aware that this might be too political, I would find it interesting to look at the interweaving of the CDU and the coal industry, but more poignantly at the role of coal workers in the CDU electorate, and how these socio-political relations have influenced the nomination of Armin Laschet (the head of one of the biggest producing regions In Germany and now of the CDU) and the possible political-economic considerations that underscore this.

  2. Hi Theodore,
    Thanks for your reply! I want to respond to 3 specific points.
    Firstly, you bring up a really interesting point regarding the decreasing competitive advantage of German coal in the international market. As matter of fact, Germany today imports all its hard coal, as domestic production/ extraction has become too expensive in face of cheaper alternatives. This implies that existing hard coal power plants are run merely for the sake of avoiding an early abandonment aka making them a stranded asset.
    Secondly, the case of the Turow coal plant showcases the complex political and social dimension of this issue. Due to the fact the Polish power plant is located close to the German and Czech borders, it is an interesting example of the difficulties in managing negative externalities of polluting production, as they are not restricted to a nation’s border.
    Lastly, the often untransparent yet obvious connections between the CDU and the coal industry are definitely worth diving deeper into. On a very basic level, there is nothing new about labor unions (the coal workers) and other economic actors (large energy companies) trying to influence political decision-making in their interest. However, it seems that both of these actors might be overrepresented to some degree in their influence on the CDU.

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