Consultants for the German economics minister Habeck pick apart permanent subsidy

 "It is still expensive to produce with hydrogen. The economics minister wants taxpayers to bear the additional costs first. But this plan falls through with experts.

The scientific advisory board of the Federal Ministry of Economics has the reputation of being an uncomfortable body. Two years ago it urged the federal government to introduce retirement at 68. In turn, the 41 scientists would like to see the rental price brake abolished. The new report, which the advisory board presented on Wednesday, is also tough, as it fundamentally questions a cornerstone of Robert Habeck's (Greens) industrial strategy.

It's about the climate protection agreements that the Economics Minister wants to conclude with selected companies. The concept behind it: Energy-intensive companies such as steel or cement manufacturers still have little incentive to switch from coal and gas to CO2-friendly production technologies. They have to pay the CO2 price. But the slightly more than 80 euros per ton at which the certificates are currently traded are still cheaper for companies than switching to green hydrogen, which is produced with electricity from renewable energies. Habeck not only wants to lure the companies with subsidies for the construction of new production facilities, but also with the fact that they are reimbursed for the additional costs during ongoing operations. The first contracts should be signed in the first half of the year.

However, the scientific advisory board thinks little of this. "Climate protection contracts are a deep intervention by the state in the market and are associated with a number of problems," says the report. 

For example, it is difficult to estimate how energy costs will develop over the next 15 years, explained the Chairman of the Advisory Board, Klaus Schmidt, who teaches at the University of Munich. According to the ministry's plans, taxpayers will subsidize production over this period. 

“This will definitely lead to companies being overfunded,” warned Schmidt.

Warning against the loss of innovative power

His colleague on the advisory board, Achim Wambach, President of the Center for European Economic Research (ZEW), also fears that the German economy will lose innovative strength as a result of the treaties. If the price for climate-friendly steel is subsidized by the state, it is less worthwhile "if someone has a great idea how to do without steel".

Despite all the criticism, the scientists did not completely advise against this instrument. "To our liking, too much money is being spent on climate protection agreements, but we won't be able to completely avoid it," said Schmidt. It is important to note that this is actually only start-up financing. 

The more market-oriented instrument are “green lead markets”. This means, for example, government regulations as to what percentage of green steel a car or bridge must contain. 

It must also be clearly defined across countries when steel is "green". In the long term, consumers would have to pay the costs of the transformation and not the taxpayers, according to the recommendation.

2.2 billion euros for decarbonization

It's about a lot of money. According to the Ministry of Economic Affairs, more than 2.2 billion euros are available in the federal budget for 2023 for climate protection agreements and the support program for decarbonization of industry. By 2040, 68 billion euros have been earmarked for the obligations arising from the climate protection agreements. Habeck was in the United States earlier this week, which promised billions in subsidies for climate protection with the Inflation Reduction Act (IRA). 

The German government emphasized that the government in Washington not only subsidizes investments, but also operating costs.

The European reaction to the IRA will play a central role at the summit meeting of EU heads of state and government in Brussels, which begins this Thursday. Habeck supported the relaxation of state aid rules proposed by the European Commission on Wednesday in the Bundestag. "We have a massive need for investment," he said. 

The USA would tempt with quick and unlimited tax breaks. Europe, too, must promote security-related branches of industry better. 

On the other hand, the Dutch government presented a position paper on Wednesday in which it clearly opposes a significant increase in subsidies. This applies in particular to the proposal to be able to counteract aid from third countries for the construction of factories with aid of the same amount ("matching").

The Netherlands are not alone in this. According to an internal Council document published by the F.A.Z. exists, two thirds of EU countries are against  "internal market distortions and subsidy races". They fear they won't be able to match the financial resources of countries like France, Germany and especially Germany. France, Italy, Spain, but also Slovakia and the Czech Republic are therefore pushing for a new – debt-financed – EU fund. The EU Commission argues that financially weak countries could fall back on unused funds from the Corona Fund. But it wants to present a proposal for a European sovereignty fund by the summer.”