Legislation Implications

As the economy stalls, there's one sector of European manufacturing which has high hopes for continued growth. Generous government incentives have meant that European countries lead the world in renewable energy technology. Denmark, where the innovative "feed in tariff" system of subsidy was invented in the 1970s, has produced Vestas, a wind energy company which enjoys a 23% market share worldwide. In Germany, where a similar subsidy system favours solar energy, some of the world's biggest players in photovoltaic technology are raising funds, confident of the prospects for expansion. Despite the Frankfurt-based DAX's poor performance - it ended August nearly 20% below the 12-month high of March 2008- shares in solar company SMA Technology have risen 40% since a launch in June. And a commitment from the European Union to produce 20% of energy from renewable sources by 2020 promises demand growth through the coming decade.

But is there a downside to governments picking winners? And are the losers from climate change policies unfairly targeted? In a global downturn, should we be looking more carefully at how we can most effectively cut carbon at the lowest cost to the economy?

Questions for the Future went to the Berlin, Germany, to ask whether subsidies and other government interventions actually distort progress towards a lower carbon economy.

Arguing for our motion was Thomas Kropp of Lufthansa, who argued that before the EU rushed to include aviation into the Emissions Trading Scheme (ETS), it should look at other policy instruments which might deliver quick environmental benefits and help the market to function more efficiently.

"It's a European solution," Kropp said of the ETS, "when what we need is a global solution. The airlines have agreed that we will participate, as we have to, but we don't want the industry here to be in an isolated position. We need the Americans, the Chinese, the Russians to also participate because we don't want to have a distortion of competition."

More immediate carbon reductions, he argued, could be gained by developing the Single European Sky, an EU initiative to integrate and streamline the different air traffic control systems within the Union.

"It would save 12% of CO2 in one moment. Every day Lufthansa burns eleven flights to New York in wasted energy and we need this new system. We have been promised that it's coming since the 1970s"

But for many in our audience, the lack of a Single European Sky was a distraction from the real costs of flying.

"Your sector is being subsidised heavily by allowing the air sector not to pay taxes on their fuel." Said Reinhard Buetikofer, Chairman of the German Green Party. "Everybody pays taxes: automobiles do, trains do, but you're exempt, and the cost is being socialised. Society altogether has to bear the cost. Why is that a market solution?"

Mr. Kropp argued that the aviation was exempt from fuel tax because it was long recognised that the sector paid the costs of its own infrastructure. Reacting to a suggestion that aviation fuel ought to be taxed, Mr. Kropp added, "Even within the European system, we are heavily competing with the world's biggest airlines. This is a global topic, and a globalised industry needs global answers."

The question of subsidies and market distortion was always going to a be a provocative one in a country where 15% of a household's fuel bill goes to climate-friendly policies, including subsidies to the renewable energy industry. But Peter Brun of Vestas, arguing against CNBC's motion, set out the case for supporting clean technologies.

"Energy is not a place where we have free competition. It's very much loaded with subsidies. It's also highly directed by policy and regulation. There's no level playing field in the energy market and so there is a need for subsidies as we search for a clean energy shift. The problem is that externalities are not being factored in to the energy price and that's why as consumers you are not paying the right price [for conventional energy]"

"I believe that governments can and must play a strong role. A good example of that is Denmark, who for the last 30 years has had a growth in its economy of 79% without any significant increase in energy consumption. That has been made possible by government intervention, energy standards, renewable subsidies and awareness campaigns."

Not everyone was happy with the higher prices. Alfred Richmann of the VIK, the industrial energy users' group, pointed out that wholesale electricity prices had risen far more after the introduction of the Emissions Trading Scheme in the energy sector.

"We are not happy with the high prices for electricity and gas. We have a subsidy volume of 7bn euros today and that will only increase."

Dr. Richmann pointed out that a lack of competition amongst utilities was responsible for high prices, and Dr. Claudia Kemfert of DIW agreed. "Germans don't pay such high bills because of the subsidies, they pay big bills because of non-competition in the market."

The solution, she argued, was through newer technology. "On a world scale we pay too much subsidy for fossil fuel and not enough for green technology. Germans would be happier if we could bring a broad energy mix to market: renewable energy and carbon free energy – which could also be nuclear. But in Germany, 50% of electricity is produced by coal, and the major question for the energy future is how we can make coal more environmentally friendly. We have to put more money into R&D."

Indeed, Germany already boasts a 30MW pilot plant for Carbon Capture and Storage at Schwarze Pumpe in Eastern Germany. But the most pressing and divisive issue for our audience members was the question of nuclear power. In 2002, the German government committed to phasing out its nuclear power capacity, which currently provides 27% of Germany's electricity, by 2020. Now that fossil fuels are looking less attractive, many are asking what will replace these reactors.

"If we stop producing nuclear power, we have a gap", warned Dr. Richmann of the VIK.

For the anti-nuclear movement, active in Germany since the 1970s and with considerable political support from both the Green Party and the SPD, there should be no extension of nuclear power. "There's a broad consensus in germany that nuclear has to be phased out," said Tobias Muenchmeyer of Greenpeace, "The costs of new plants keep rising, and we're seeing more incidents at aging plants."

But Dr. Joachim Pfeiffer of the CDU argued that the situation was changing as people recognised the climate benefits of nuclear. "I don't think there's a broad consensus in Germany to phase out nuclear power. There's no single solution: we need an energy mix. If we keep nuclear and also increase renewables then we have the chance to have up to 70% CO2-free electricity by 2020"

Dr. Axel Berg of the SPD, who believes that renewable energy can fulfill all of Germany's energy needs in the mid to long term, summed up the stand-off: "nuclear seems very cheap to us because we leave the disposal costs to the next generation. The business costs are very small but the costs for the nation are very large."

As Germany enters both an election year and an economic downturn, the energy debate looks set to dominate the political agenda for many months to come.