And a tough winter is coming.
I left Germany in 1990 as a long haired, smoking, bearded hippie with a guitar in one hand and a bag full of dreams of a better world.
I had just read the recently deceased Jim Lovelock’s collected works, which put me in a better mood after having spent two years thinking I needed to like the existentialists. 32 years later, the Auffhammers just returned from a glorious few weeks in Europe. Here’s a picture. I mean, come on.
If you have read my posts, you know that I like good economics and food. So let’s recap. A gallon of gas in Germany is $10 on a good day. Check. There is a tradable permit market, with a serious price on carbon ($100 yesterday!). Check. Homes are well built, insulated, and public transportation works (it’s not on time, but I am a patient person) and the place is serious about doing something about getting to net zero. Check Yes, there’s not a speed limit on the Autobahn, which is where I learned that an empty Prius xB with the AC turned off, downhill goes 120mph. Also, the food. While gas is expensive, good wine is cheap and $10 buys you a plate of food that makes you want to cry from happiness. So in the long run, things in my home continent along these two dimensions are good.
But then there are some odd things. And I am not talking about Documenta (most of which I did enjoy a lot), but energy policy. The main conversations I had over dinner in Europe were about energy policy. As we all know from reading this blog, economics-free spaces can result in some seriously misguided policy. Let me pick three European examples:
- Nuclear policy. In 2011 Germany decided to mothball its nuclear (carbon free) power plants in response to the Fukushima disaster. Whether you like nuclear power or not – and personally I do think that nuclear energy has to be a meaningful part of a carbon free future– retiring operating plants in Germany right now is a terrible idea. We are headed into a winter, with significant natural gas shortages. At the same time, the European grid is integrated and there are problems elsewhere (e.g., France). So if there are electricity supply shortages elsewhere in Europe and gas for power generation (and heating) is short, shutting down nukes now is silly. Germany seemed to backpedal recently and contemplated keeping running three nukes that were going to be mothballed. No more. I would argue that one might want to not only think about delaying the mothballing, but bringing ones that are currently offline back online (if there is enough water in the rivers to cool those plants). I am not arguing that we should build more in the short run, but these plants already exist. Sunk costs people! The argument is that keeping the Nukes online would only decrease gas consumption by 2% or so. That sounds like a little. But if your supply and demand are vertical, 2% can send prices into the stratosphere! If you don’t believe me, call Jedi Knittel.
- Natural Gas and Gasoline Pricing. Half of Germany heats with gas. If you have ever experienced a German winter, it’s cold. Not Minnesota cold, but really cold. If Russia turns off the natural gas supply, markets will do their thing and prices will skyrocket. We are seeing small signs of this in futures markets already. Yes, noone likes skyrocketing prices. But, if something is scarce, a higher price reflects this. Similarly, Germany is doubling down on their stupid gasoline policy, where they are cutting back on the value added (speak sales tax) to protect consumers from high prices. AAAAAARGGGGGHHHHHH! Let me make this simple for you. Don’t do it. What you want to do is let markets do their thing, and you take that tax revenue and you send a check to the people suffering the most from the high prices. Do not send Max with his fancy professor salary a check! Send my higher sales taxes to my graduate students. And let them decide whether they need gas more than food (which has also become more expensive).
- Transportation policy. You should always say something nice. In order to decrease gasoline demand, the Germans issued something called a 9 Euro ticket. For one month, ride as many trains as you want, for a flat fee of 9 Euro. This protects folks who do not have money for a more expensive tank of gas, gets people to realize that trains are more fun than cars (I mean, cappuccinos!) and lets graduate students visit their parents! Yes, the Bundesbahn (German Amtrak) takes a hit, but this is a subsidy I could get behind if the federal government decides to absorb it. My colleague Michael Anderson has written a large number of awesome papers showing the societal benefits of getting the marginal driver off the road. And Michael is never wrong.
So in short, I am really worried about my European friends and family. This winter is going to be tough. Ed Rubin and I have shown that low income folks in winter cut back their consumption the most. An equitable energy policy portfolio would keep the lights on, issue them a check so they can make it through the winter and make sure they have a way to get from place A to place B.