A Privileged Source of Information


Roland Menges


This wind is more than just a gust. It seems that climate change is becoming the greatest environmental problem we have to face. Autumns with unseasonably mild temperatures, early-arriving springs, dry summers, increasing sea levels and recent weather extremes such as devastating floods, storms and coral bleachings tend to be indicators of an irreversible process. Some leading scientists predict that the world´s average surface temperature will increase from 1.4 to 5.80 C by the year 2100, causing huge costs for both developing and industrialised countries. Even though it is not clear whether these changes are partly or solely due to human activities, the economic precautionary principle states that pending certainty, regulators should act in anticipation of potential environmental harm in order to prevent it - particularly with regard to the emission of so-called greenhouse gases such as CO2. Hence, activities to reduce the emission of CO2 are needed very urgently, especially in the energy sector, which is responsible for a 50% share of worldwide CO2 emissions.

The general normative basis of discussing the usefulness of certain policies to meet the challenge of climate change is laid by the sustainability principle. Although this principle is very prominent, especially in international discussions, its exact meaning remains somewhat unclear. It is borrowed from forestry and entails some guidelines, how to manage the depletion and the use of scarce resources. For about two decades now, the term “sustainable development” has characterised the discussions about conserving the natural environment, distributing prosperity more fairly throughout the world, and enabling more humane living conditions for all people. Moreover, sustainability encompasses not only ecological but also economical and social aspects, which have to be considered collectively. A comprehensive definition for sustainability was first formulated by the Brundtland Commission, adopted by the Rio Conference 1992: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” A sustainable system should lead to non-decreasing consumption possibilities of future generations and to sustained, non-degrading capital stocks, including the natural capital. Accordingly, the most common operational conception of sustainability is based on three criteria with regard to the maintenance of the natural capital stock of the earth: For renewable resources, the rate of harvest should not exceed the rate of regeneration (1). The rates of waste generation from projects should not exceed the assimilative capacity of the environment (sustainable waste disposal) (2), and for non-renewable resources the depletion of the non-renewable resources should require comparable development of renewable substitutes for that resource.

The problem of adapting this normative concept into more practical measures is its abstract and highly aggregated nature. There is a huge and growing body of literature around this concept and a lot of people have the feeling that sustainability is the adequate answer to overcome the disadvantages of short-sighted economic theories and to address the threats of a liberalised and globalised world economy. Sometimes, when this concept is used to solve all economic, social and environmental problems simultaneously, such as the current and future problems of world energy and resource markets, or when it is used to differentiate between “good” and “bad” technological innovations, this discussion leads to the search for the holy grail. There are, for instance, some researchers who believe that our sustainable future economy will be 100% hydrogen-based, whereas other researchers state that the only possible solution is an economy based solely on renewable energy. However, as Mark Knopfler tells us in his song “Industrial Disease”: “Two men say they´re Jesus – one of them must be wrong.”

Whereas at the aggregate level a lot of details of the adequate measures to address the problem of global warming (i.e. how to weight energy consumption-reducing conservation measures against measures to increase energy efficiency or against the use of renewable energy) are far from being clear, the positive significance of wind energy for solving sustainability problems is widely accepted. Wind turbines use energy from the motion of the wind to make mechanical energy and convert it to electrical energy. Because no combustion occurs in wind power generation, there are no direct emissions of greenhouse gases or other pollutants. Hence, the economic benefits of wind energy are two-fold: by substituting fossil fuels in electricity generation it helps to save scarce resources and to avoid emissions. Wind power has a long history. It has been used by man from time immemorial. Windmills ground grain and drove water pumps for irrigation and drainage purposes. In 1900 there were some 30,000 windmills still operating in Northern Germany alone. Only once electricity became available and affordable everywhere in Germany did the windmill disappear from everyday life. The first endeavours to revive this climate-friendly and resource-conserving technology were started in the fifties by German pioneers and following the oil crisis of the seventies wind power faced a renaissance. Despite some problems with public acceptance when wind energy plants are built too densely in certain regions, wind energy is widely accepted and perceived as a strategic factor in environmental policy. As long as the use of other kinds of renewable energy has strong disadvantages in relative costs (i.e. photovoltaics) or is restricted in terms of natural conditions (i.e. water power), wind energy will play a prominent role when capacities to produce energy from renewable sources are to be increased.

Due to attractive, publicly guaranteed financial conditions for the investors, the wind power capacity installed in Germany has been growing considerably for years now. New wind turbines with a capacity of 1,810 MW were installed in 2005, thereby increasing the number of wind power stations to some 17,570 installations with a total installed capacity of 18,428 MW by the end of 2005. In 2005 the Germans spent more than 4 billion € for supporting renewable energy in the power sector. With a total electricity yield of 26.5 TWh, wind power now provides some 4.3 % of the electricity generated in Germany, which is equivalent to a reduction of CO2 emissions of about 24 million tons. To compare: Within the framework of the EU-wide CO2-emission-trading system German industry is endowed with allowances to emit nearly 500 million tons CO2.per year. Hence, wind energy theoretically could contribute a 5% reduction of these emissions. The German government claims to be the world champion and leading country in the field of wind energy: Nearly one third of world-wide generation capacities (50,000 MW) and about half of the European capacities (35,000 MW) are located in Germany. Obviously, the reason for this success story cannot be found in local advantages for producing wind energy. There are a lot of countries in the world with much better average wind speeds than Germany. Moreover, nearly 50% of the German wind energy capacities are located in inland regions, where the wind blows merely as a gust – compared with the wind-rich coastal regions. From an economic point of view this is very unsatisfactory, because the better the local conditions (measured in wind speed) the lower the costs of producing electricity.

The question remains why other countries do not follow the German way and invest so much in wind energy. To analyse different bevaviour by national or international decision-makers in contributing to a common goal, economic theory uses the concept of public goods. A good becomes public when its consumption fulfils the following two conditions: it is not possible to prevent certain individuals from consumig this good (non-excludability condition); and the access of new consumers does not diminish the consumption possibilities of the current consumers (non-rivalry condition).

Conventionally, the normal market mechanism cannot be used for producing such kind of good. Because no-one can be excluded from consuming it and consuming itself does not harm the others, there is no incentive for any potential consumer to spend money or resources for the provision of this good. In the case of well-known textbook examples such as running a lighthouse or an army (for defending the home country) it is always the national state who has to solve this problem by collecting taxes and providing its citizens with the good or service. Preventing or limiting climate change is a pure public good, too. Compared to the lighthouse, the only difference can be found in the regional aspect, because it is not a national or regional, but a global good we are to provide. Technically speaking, the total reduction of greenhouse gas emission becomes the input factor for producing the public good “climate protection”. Hence, climate protection simply consists of the sum of the activities of all countries. Because the costs of providing this good are always private and the utility is – by definition – always public, there is a strong incentive for all countries to take the contributions of others as given and to reduce own contributions (free-riding). Related problems can be found in the field of international public goods such as “reducing transnational terrorism”, “finding a cure for contagious diseases (e.g. AIDS)” or “developing a tsunami early warning system”. Of course all these cases are different in terms of induced private (national) by-products, intra- and intergenerational aspects or regional impact. But together they share the common characteristic that successful collective action requires that all participants perceive a positive private net benefit. In economic theory the problem of free-riding is not dealt with as a moral problem. In the absence of an utopian worldwide government or authority, international negotiations, treaties or other institutions are needed to create stable and trustworthy incentives for all countries to participate.

Although it is criticised as a weak and short-term oriented approach for climate protection for good reason, the Kyoto Protocol, signed in 1997, is the first global agreement among 84 countries to slow down global warming by reducing greenhouse gas emission. Generally, in providing public goods two core questions are to be answered: Which amount of the public good should we provide (i.e. measured in terms of accepted global temperature increase, or in absolute quantities of greenhouse gas emissions)? How should this be financed and who should contribute which quantities?

The Kyoto Protocol answers the first question insofar as it requires legally binding emission commitments from all developed countries, averaging 7% below 1990 levels. To solve the second question, individual targets were established for each participating country. Germany, for instance, agreed to reduce its CO2 emissions by 21%. In order to reach this given quantitative goal in a cost-efficient manner, the German government endowed the companies of its energy sector with a fixed number of CO2-licences and allowed these companies to participate in the EU-wide system of trading CO2-allowances.

How does wind energy fit into this international climate protection framework? Although wind is available for free, this does not mean that CO2-abatement and the energy that is generated from wind power plant is costless. Reducing emissions by investing in wind energy plants is only one possible means to reduce emissions. Other candidates are, for example, measures to increase the efficiency of existing coal-fired power plants, fuel switching or energy saving measures. Quantifying the costs of CO2 abatement via wind energy depends on a lot of specific factors, because the quantity of CO2 emissions which actually are to be avoided depends on the structure and efficiency of those power plants which are substituted by wind energy. But if one expresses the costs of alternative measures for emission abatement in terms of Euro per ton of CO2-savings, it becomes obvious that wind energy is quite a lot more expensive than equivalent measures. Hence, harvesting the wind may be a good measure in order to save scarce fossil resources. Investments in wind energy may induce technological changes and innovation - as a measure to avoid emissions it leads to relative high costs and cannot compete with other measures to protect the climate.