BASF, the world’s largest chemical company, has been headquartered in Germany since before the country formally existed.
Founded in 1865 by the industrial pioneer Friedrich Engelhorn, it still occupies the vast site on the banks of the Rhine at Ludwigshafen where its first dye and soda factories were built. A third of its staff are employed in Rhineland Palatinate. It is a global company, yet as German as Goethe and gummi bears.
A few days ago Kurt Bock, the firm’s chief executive, warned that its Ludwigshafen plant may soon be forced to close, with BASF’s German jobs relocated elsewhere. The reason, he said, was Germany’s soaring energy costs and the crippling green levies being used to pay for ‘renewables’ such as wind farms. With German energy prices already twice as high as in the United States and likely to rise much further, the time had come to reconsider ‘the competitiveness of the location’.
BASF’s British rivals should take no comfort from this. For years Britain has, like Germany, chosen green energy over cheap energy – and piled regulation after regulation, levy after levy, on the providers of fossil fuels. In Germany the effect is now becoming apparent: the sacrifice of industry on the altar of environmentalism. It may sound like economic suicide, but it is precisely the policy which David Cameron’s government is pursuing.
Energy now stands at the very centre of British politics, a subject enlivened by Ed Miliband’s pledge to freeze household energy bills. His policy is wildly popular, seeing as gas and electricity prices have roughly trebled in the past ten years. More than five million households are now in fuel poverty. As winter advances, the choice between heating or eating isn’t some abstract slogan, but a daily dilemma. Each winter in Britain, some 25,000 elderly people die from the cold.
But the debate has been bizarre. Politicians from all benches of the Commons like to lambast the Big Six energy companies, without mentioning their own culpability. Mr. Miliband talks about forcing energy bosses to take pay cuts. Meanwhile David Cameron and Ed Davey, the Liberal Democrat Climate Change Secretary, suggest the answer is to fiddle around with schemes such as the ‘eco’ levy which subsidises home insulation, and move them from fuel bills to general taxation, so cutting bills by 7 per cent. Nothing either side is discussing will make more than a temporary cosmetic difference.
While they bicker about trimming a few tens of pounds here or there, Parliament has been dealing with the closing stages of the Energy Bill. This, working in concert with its predecessor, the 2008 Climate Change Act, will inflict the biggest fuel bill increases of all. The 2008 measure enforces a legally binding carbon emission target for 2020. But because it’s much harder to cut emissions from transport and heating than electricity generation, this will mean trebling the proportion of power produced by renewables from its current 11 per cent over just six years.
The cost of this swift and radical transformation dwarfs marginal items such as the eco levy. According to the ‘levy control framework’ established by the Energy Bill, it means more than tripling renewable subsidies to £7.6 billion by the end of this decade. The total renewable subsidy which UK consumers will have paid via higher energy bills for the ten years to 2020 will be an almighty £46 billion.
Even this eye-watering figure is a massive underestimate. This week, the National Audit Office said bills were likely to rise above inflation for at least 17 years, with the cost of government commitments likely to be at least £700 per household. According to the energy experts Professor Gordon Hughes of Edinburgh University and Peter Atherton of Liberum Capital, the Energy Bill figure does not factor in the enormous cost of connecting wind turbines to the National Grid, nor the complicated switching mechanisms needed to deal with the fact that no turbine will actually produce power for more than a third of the time. They say the true green bill by 2020 could be more than £100 billion, with households paying around £400 more per household for electricity alone.
For voters, this will mean years of further cost-of-living misery. But for business, it may well lead to German-style bankruptcy. About two thirds of this legally mandated ‘dash for wind’ will be paid for by companies. Some will find it intolerable, and join previous casualties of Britain’s green revolution such as aluminum smelting. Those that remain will have little choice but to pass their bills on to customers – so many other things will become more expensive, too.
This year, unique among nations, Britain introduced a tax on emitting carbon dioxide, the ‘carbon price floor’. This means power generators must pay £16 for every ton of carbon dioxide they emit. The Climate Change Committee, set up by the 2008 Act, has determined this should quadruple by 2030 – for the 2020 emissions target is only the start. The Climate Change Act already imposes still more ambitious targets for 2027 under what is termed the ‘fourth carbon budget’, which will see electricity generation almost entirely ‘decarbonised’. According to Atherton, the cost of effecting what will amount to a revolution in the crucial industry on which all others depend will be about £300 billion – a figure very close to the NAO’s. Here too the pain in store for British business is unique. No one anywhere else has enacted binding targets beyond 2020.
This is where Germany’s present agony becomes instructive. The infrastructure of the most costly power ever invented, offshore wind, is well-advanced there, though in Britain it remains in its infancy. The result, as Der Spiegel reported recently, is that green subsidies have already ‘reached levels comparable only to the eurozone bailouts’. This year, German consumers will pay a total of €20 billion for power from wind, solar panels and biomass – of which a staggering €17 billion is subsidy.
Earlier this year, BASF decided to build a new ammonia plant in the US because the American shale gas boom, which caused electricity costs to plummet and hence an industrial rebirth in the rustbelt states. Last Tuesday week Hariolf Kottmann, who runs BASF’s Swiss competitor Clariant, said he no longer had any reason ‘to invest a penny’ in Germany: ‘We had two or three projects planned. Now we prefer to invest in the United States.’ He said the renewable levy the firm was paying for its factory in Frankfurt-Hochst had almost doubled since 2011 – making energy twice as expensive as in China and America. And yes, he mentioned those two countries in the same breath.
As German companies know, things could be about to get worse. Germany has so far exempted manufacturing companies from most of their renewable subsidies. The European Commission has launched an investigation, and may now declare that this amounts to an unlawful state subsidy. If the exemption is removed, BASF says it would expect to pay an extra €400 million a year just for Ludwigshafen – a total which will, of course, only rise. A further 300 German manufacturing companies get the exemptions. What’s the point of eurozone bailouts if German industry, which survived the great recession so well, collapses?
Britain’s Energy Intensive Users’ Group, representing businesses on which 800,000 jobs depend, has pushed the government for similar exemptions. Some have been offered, though a government report last year admitted that British business will soon face the highest green costs of any of 11 major industrial countries surveyed – 50 per cent more than in Germany and nearly twice those of France. ‘The industries with the heaviest reliance on electricity are also those most sensitive to foreign competition,’ says the group’s director, Jeremy Nicholson. ‘Thousands of jobs will be lost.’
It isn’t easy to disentangle the impacts of energy and climate policies. Official documents are written in a jargon that is virtually impenetrable. Worse is the sheer Panglossian dishonesty of the policies’ exponents. Ed Davey’s Department of Energy and Climate Change says that energy bills will be 11 per cent lower by the end of the decade, and the minister invites our applause. But the small print reveals a distinction between ‘prices’ and ‘bills’. The price of electricity, he admits, is set to rise by at least a third because of his green policies. So why the cut in bills? Better insulation and boilers, apparently – and, one might add, lower demand, caused by rocketing prices and thicker woolly jumpers.
It isn’t hard to conceive an exit from this strategy: repeal the Climate Change Act, abolish its targets, and stop the Energy Bill coming into force. We could get on with fracking and so release our colossal reserves of clean natural gas. Professor Hughes says that to retool the electricity industry to rely on modern ‘combined cycle’ gas plants would cost about £15 billion, with no subsidies necessary. This would be following the American example, where carbon emissions have fallen to a 20-year low because they are so much lower in gas than in coal. We could then invest some of the billions currently spent on wind on research into non-fossil energy sources such as nuclear fusion – much closer to viability than most people realise.
But the intellectual shutdown in British politics means that such ideas cannot be publicly articulated. Some cabinet members – notably George Osborne and the Environment Secretary Owen Paterson, a keen supporter of fracking – have a sense of the looming crisis. But while the coalition remains in office, they are powerless: green energy is the closest thing the Liberal Democrats have to a religion. Nor is Ed Miliband likely to tear up the Climate Change Act he authored – and anyway, it’s politically useful to him to cast energy companies as national villains.
In the unlikely event that the Conservatives win an outright majority, it’s far from clear that the party is capable of thinking clearly about how to avoid this catastrophe. Even Osborne ended up signing the most expensive deal in energy history. Astonishingly, the Chancellor has guaranteed to pay EDF almost double the market price for power from the nuclear plant that is to be built in Somerset, for 40 years. Why would he do that? Because the Tories have not allowed themselves to think rationally about energy for at least eight years. Even if they want to avert disaster, they don’t know where to start.
Britain is sleepwalking towards the same economic calamity for which Germany is now bracing itself. Even ministers who can see the coming disaster lack the power (or knowledge) to change course. They will be all too aware of the absurd truth: for all the crocodile tears about rising energy costs, all three parties have agreed upon a range of policies specifically designed to cause prices to soar – with the inevitable consequences for families and businesses. The current squabbles about energy bills are just a prelude: a far bigger, deeper and more dangerous crisis awaits.
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