Dinner Speech Ban Ki-moon – Copyright: DGVN 2014

At the end of January I had the honour of being invited by the United Nations Association of Germany to give a short speech at a dinner with the Secretary-General of the United Nations Ban Ki-moon in Berlin.

Here you can download the script of my speech: Dinner Speech Ban Ki-Moon

The core of the answer to the energy challenges may not come from modified energy supplies but from a systematic, long term strategy of increasing energy productivity, which essentially means curbing energy demand while further increasing prosperity.

As a matter of fact, huge efficiency increases are theoretically available. In a book, Factor Four, also available in Chinese [1], fifty examples were presented of a quadrupling of energy and material productivity. A more ambitious sequel, called Factor Five [2] is under preparation and will focus more on systemic productivity increases beyond isolated efficiency technologies. Eventually, even a factor of twenty should be feasible, which could solve most energy-related problems of climate, the local environment and social equity, both in China and world-wide.

A strategic increase of energy productivity looks like a highly attractive national goal for China.

Surprise lesson from history: resource prices have been falling

Despite basically well-known potentials, there are few signs in any country of aggressively pursuing the energy productivity agenda. Australia’s and other countries’ decisions of phasing out incandescent light bulbs, Japan’s top runner program, the EU’s emissions trading system ETS, and China’s commitment in the 11th Five Year Plan to increase energy productivity compare favourably with the inertia in other parts of the world. But even these laudable measures fall very far short of meeting the challenges.

The basic reason for inertia on this front, so it seems, is a world-wide policy of keeping energy prices as low as possible. This has understandable social reasons but it also sends a signal to consumers, manufacturers, and investors that energy efficiency and productivity will be mostly left to idealism or some mild state intervention. The trillions of yuans, dollars, and euros invested annually in new businesses and infrastructures have almost no commercial motive of addressing energy productivity. This is the reason why many of the of the Factor Four examples, such as Amory Lovins’ high tech ‘Hypercar’ needing less than 2 litres per 100 kilometres, have not made it to the market. For reaching the market in significant numbers, they require huge investments, which won’t pay off under present conditions.

To make such strategic investments in resource productivity profitable, resource prices should go up. But so far, the opposite has happened. Combined efforts by politicians, entrepreneurs and mining engineers have established a long term trend of continuous decreases of resource prices, as shown in Fig 1 for “raw industrials”, meaning natural resources of industrial importance, including energy. This comes as a big surprise to many who are accustomed to complaining about high resource prices. The price hikes of the past couple of years have just brought us back into the lower confidence interval of the long-term downward trend. (The picture does not reflect the development after 2004!)

Fig. 1: Industrial raw resource prices, inflation adjusted over 200 years. Prospecting, mining and transport technologies were the main drivers. The price hikes since 2000 have just brought us back into the lower confidence interval of the downward trend! Source: The Bank Credit Analyst, 2005

There have been a few periods during which resource prices increased, notably the two World Wars. More memorable in our times have been the oil price shocks of the 1970s, which can also be seen in Fig. 1. In 1973, the oil exporting countries managed to quadruple oil prices overnight and push it further up in 1978. However, the rest of the world reacted by stepping up prospecting and mining until, by 1982, oil prices had come down to pre-1973 levels.

During the first years of the 21st century, many people felt that now, finally, resource prices were now going up irrevocably. The new surge of oil, gas and other mineral resource prices was triggered by steeply rising demand from the rapidly developing Asian economies, led by China. But China and the world wide mining companies have immediately thrown a lot of money into new prospecting and mining, which brought the surge to a halt and there are indications that commodity prices come down again, at least in constant dollars.

Typically, it is the geological limits and extraction and refinery cost that ultimately determine prices. In earlier decades, also access and transport limitations played a major role, but the share of transport cost has been falling systematically over time. If the geological limits remain the main determinant factor for resource prices, it can be assumed that oil prices will come down to something like $80 per barrel, reflecting the price of coal (at a high estimate of $100 per short ton of coal) plus the liquefaction cost at industrial scale plus company profits. Clearly, this price would be a blow to all investors putting their money into high tech vehicles like the Hypercar.

Active policies of raising energy prices

If markets (plus socially motivated price subsidies) lead mostly to low prices and if low prices are seen as the main obstacle to the efficiency revolution, then it would seem evident that China and the world should go for a policy shift from keeping prices low to actively increasing them.

Different instruments are available to put price tags on energy or, for that matter, on carbon dioxide. Theoretically, prices can be fixed by the state, — although in the past this was mostly done to keep prices low. Fees and charges can be levied. The EU’s ETS, a cap and trade regime, serves to put a price tag on fossil fuels. Some states, notably in Europe, beginning in Scandinavia, have introduced energy taxes.

An interesting variant of energy taxation has been the “escalator” idea of adding small annual price signals that were agreed for many years in advance. This has been first introduced in Britain and copied in Germany with some modifications. In retrospect, it can be said that the escalator proved very effective in reducing demand, as can be seen in Fig 2, which compares the two countries with Canada and the USA with regard to fuel consumption/ CO2 emissions per capita and year.

Fig. 2: Steering effect of fuel tax escalators (Picture: FÖS, 2006, Database: DIW, 2005)

Increasing energy prices in parallel with energy productivity gains

Combining the escalator idea with the long term goal of increasing energy productivity, leads to a novel policy proposal, namely to politically establish a trajectory of steadily progressing energy and commodity prices, with the slope of the trajectory being determined by the statistically established increases of energy and resource productivity.

If energy prices increase only in line with average energy productivity gains, then, by definition, there would be no additional suffering. This is of highest political significance and contrasts favourably with experiences from the past of rising energy prices causing major hardship for families, small enterprises, and whole branches of industry. The negative effect, however, has always been associated with the size and suddenness of the price increase and with its unpredictability, allowing no advance adaptation.

Despite this socially most welcome feature, the long term escalator sends a strong signal to investors, manufacturers, consumers, and infrastructure planners to be prepared and to adapt. In all likelihood, the signal will actually accelerate investments into energy efficiency technologies and energy productivity creating systems.

The trajectory would have to be kept stable for many decades. Investors will be all the more courageous the longer they can rest assured of the trend. The time horizon of the measure should be at least as long as the payback time of the most important investments, meaning long lasting infrastructures. A glance back in history shows that under the conditions of the low gasoline prices in the USA, an investment like the Japanese bullet train (Shinkansen) would never have been possible.

Are there alternatives to a tax system for establishing the price corridor? Just theoretically, increasing resource prices can also be induced by an ambitious cap and trade regime with gradually tightened cap levels. However, past experiences with cap and trade regimes show very unpredictable fluctuations, resulting in part from speculation. There is no way of linking resulting prices to previous efficiency gains.

Is there a problem for the poor or industry or inflation?

Objections against an ecological tax escalator can come from advocates of the poor, from industry and from inflation fears.

Advocates of the poor will hint at the relative importance for the poor of the energy costs in the consumer basket. Energy and water taxes tend to be “regressive”, i.e. hitting the poor more than the rich. To answer this problem, it is possible to grant a tax free or tax reduced minimum tableau of, say, one gigajoule of energy per person and week. Then the really poor would actually benefit, while the burden would shift towards middle income and rich strata of the society.

Blue collar workers, too, have a tendency of opposing energy taxes. They typically use the lines of arguments of the poor and have apprehension that energy taxes might destroy industrial jobs. But as demand for industrial output is rising, a country like China need not fear net job losses if the price increase goes slowly and predictably.

Industry and investors are actually likely to benefit from the predictability of the transition. They can move into ambitious technological and infrastructural projects with very limited risks, leading eventually to major advantages over competitors working under conditions of fluctuating if somewhat lower resource prices who invariably giving too little attention to the long term scarcity of resources.

Another concern, very relevant in China today, is inflation. However, a tax shift could be made from value added taxes to energy, which a net neutral effect on inflation.

Evidently, it would be desirable for both ecological and economic reasons to find international agreement on price trajectories. But if the increase is linked to productivity gains, pioneering countries are likely to benefit, not loose because they will be at the forefront of a trend that will come world wide anyway.

The paradigm of a twenty-fold increase of labour productivity

The history of technological progress so far is the history of the increase of labour productivity. It has been a revolution indeed, the Industrial Revolution. Labour productivity grew easily twenty-fold over time. During the 19th century, the increase in what became to be the industrialised countries was some one percent per year, which is not all that spectacular. The rate increased to one and a half percent during the first half of the 20th century and to two percent thereafter. But there have been phases like Germany during the late 1950s, Japan during the 1960s and China after 2000, where it increased more than seven percent per year, — to a large extent by copying technologies that had been developed elsewhere.

One fact, well-known by organised labour and by employers, is that wage negotiations have always taken labour productivity gains as their yardstick. It was only during the recent neo-liberal and neo-conservative phase since the early 1980s, that wages began to lag behind productivity gains, due mostly, as the employers saw it, to competition from low wage countries. What is not so well known is that productivity gains also went up in parallel with gross labour cost. What was the hen and what was the egg? Empirically, we observe wages and productivity going up in parallel (Fig 3).

Fig. 3: Rise of wages and of labour productivity mostly in parallel. The picture shows this for a time span of fifty years in the USA, but very similar pictures are available for other countries and other periods of time.

This trend of labour costs spurring labour productivity is an exciting indication for the potential of using energy price signals for spurring energy productivity gains. As a matter of fact, the “oil crisis” of the 1970s served as an (unplanned) experiment for this hypothesis. As energy prices went up across the board, a new mentality set in that focused on energy efficiency. Fig 4 shows the effect.

Fig. 4: The oil price shocks of 1973 and 1978 triggered a steady increase of energy productivity in the USA. The new mindset of energy efficiency survived even the period 1981–2000 of receding energy prices.

A revenue neutral ecological tax reform

The paradigm of labour productivity seems to support the idea of a steady increase of energy prices. As said before, if energy prices increase in line with average energy productivity gains, there would be no average suffering. The situation can become even more attractive if the fiscal income from energy taxes is re-channelled into the economy by reducing the fiscal or parafiscal load on human labour thus giving an additional push to overcome unemployment. But if inflation is the highest concern, the reduction of VAT is a more plausible candidate.

The new idea is to make the trajectory of energy prices very predictable by compensating world market fluctuations. Downward fluctuations would be compensated upwards and upward fluctuations such as the painful price hikes of late 2007 could be compensated downwards, so as to bring prices back to a previously agreed price corridor. The slope of the upward corridor could be determined annually (or every five years by the cycle of Five Year Plans) in line with measured average efficiency gains over the previous year (or years). Adjustments could be allowed on a quarterly basis so as to make prices even more predictable.

The system could be differentiated for vehicle fuels, electricity, carbon content, and other criteria. It will be a matter of political priority setting weighed against simplicity.

This system of increase should be made a law that is valid for some twenty years or even fifty or more years, with fairly tough clauses for exemptions or deviations from the rule.

It is conceivable to develop a similar system for materials and for water. If prices for primary raw materials and for water extracted from nature go up steadily, the incentives increase for reuse of materials and for water purification. Simultaneously, the profitability of mining operations go down, — which is exactly what we want.

Long term price elasticity is high

Generally, it can be said that energy and resource consumption have a rather low price elasticity in the short term. (Otherwise, the upward curve in Fig. 4 would have started in 1973 or 1974, not in 1977!) In the long run, however, the price elasticity is astonishingly high, as can be seen from an observation made by Jochen Jesinghaus [3].

The picture shows a striking negative correlation between fuel prices and per capita fuel consumption. Ten years after the introduction in the US of the Corporate Average Fuel Economy (CAFE) standards, this country although admirably catching up on per mile fuel consumption was still the country with by far the highest per capita fuel consumption. In other words, under the condition of low fuel prices what CAFE conveyed to automobilists was: “Now you can drive more miles for your bucks”. Which they did.

Fig. 5: Even for petrol consumption which is often referred to as nearly inelastic to price changes, we observe a near perfect price elasticity – if we ask the right question. The question asked for this graph was: how much petrol is consumed per capita and year in different OECD countries that have nearly equal levels of wealth and mobility? Countries had more or less stable policies on domestic fuel prices for many years preceding the year (1988) in which the data were collected. The picture reflects long term price elasticity.

This experience is very valuable for determining a price trajectory overcoming the dilemma of short term instruments. We can safely rely on small signals if we give the society assurance of a long term upwards trend for energy and other resource prices.

[1] Von Weizsäcker, Ernst Ulrich, Amory Lovins, Hunter Lovins. Factor Four. Doubling Wealth, Halving Resource Use. London. Earthscan, 1997; also available in 12 other languages including Chinese.
[2] Von Weizsäcker, Ernst Ulrich, Charlie Hargroves, Michael Smith. Factor Five. London Earthscan, 2009.
[3] Ernst von Weizsäcker and Jochen Jesinghaus. 1992. Ecological Tax Reform. London, Zed Books.

CCICED Taskforce on Economic Instruments for Energy Efficiency and the Environment
Interim Report 2008, Draft segment submitted by Ernst Ulrich von Weizsäcker

Let me at the outset distinguish two different tasks of environmental policy.

• One is pollution control which is predominantly a local and a national activity. The first twenty years of environmental policy in European countries were almost exclusively devoted to pollution control, and the role of the European Community – later Union – was chiefly to set standards that aimed at harmonising national pollution control legislation, and that more of environmental professionals both in the public and private sectors deal with pollution control.
• The other task of environmental policy relates to global and long-term challenges such as climate change, biodiversity losses and unsustainable lifestyles. This is rather a new field of concern and is still in its conceptual phase regarding policy making.

Prices can work for the environment in both arenas. But if one pricing instrument is successful in one of the two, it does not necessarily follow that it is applicable for the other as well.

For pollution control, pricing instruments abound and have greatly helped cleaning up the environment. A typical case has been the waste water charge the revenues of which were used to finance water purification installations. This system of charges most widely used in the Netherlands but also in all other EU countries was highly successful environmentally. It never was very controversial. It fully conformed with the polluter pays principle and it had the attraction that he who applied prevention measures in his factory was freed from the charge.

In a wider sense the same applies to user fees, refund systems, violation penalties and tradable emission permits for classical pollutants such as SO2 or NOx They too met with rather little public resistance when introduced.

Let me not lose more time on this subject because we would all agree very soon that prices work well to reduce classical pollution. Nevertheless, if the EEB wants to document the findings of this conference, I suggest to add an expert paper by an environmental economist on many successes and a few failures.

Let me instead turn the attraction to the other subject, of long term and global environmental problems, notably the greenhouse effect and life style changes.

Let me at this juncture mention one major difference between the two fields of concern. For classical pollution control you could say it is good to be rich so that one can afford costly pollution control. Or, with a slightly modified meaning you can quote Indira Gandhi that “poverty is the biggest polluter”. This famous statement goes down extremely well with developing countries, but equally well with traditional business people and other people in the North because it justifies them to go on with traditional growth strategies and claim that this is good for the environment.

The opposite, or nearly, can be observed when we address the greenhouse effect, biodiversity and sustainable life styles. Here clearly prosperity is the biggest polluter.

This is so embarrassing a phenomenon that economists and politicians prefer not to recognise its truth. They hastily invoke the sustainable development triangle which says that economic and social well-being are equally important as a healthy environment. And very soon they return to the comfortable and familiar paradigm of pollution control where economic prosperity was not at all suspicious. You will discover that in their argumentation the environmental corner of the triangle is always classical pollution control. I am afraid, for the time being I have to invite you to be extremely cautious, if you are an environmentalist, when that triangle of sustainability is put forward.

But now comes the shock for us advocates of pricing instruments: In a domain where prosperity is the biggest polluter, all of a sudden, you have to admit that prices are meant to reduce “prosperity”, – at least the kind of prosperity that is causing so much CO2 emissions, land use, traffic and avalanches of materials. If you want to reduce urban sprawl, you have to say that people shouldn’t live in one family homes and commute to work with their cars. You want them to cut their energy and water consumption. You want them to stop buying lots of unnecessary trash goods and having weekend trips to Malaga and Christmas trips to the Seychelles. Don’t expect anybody, let alone democratic majorities to agree with these objectives.

And yet, having said all this, I remain a staunch defender of pricing instruments also for the second set of problems. How can that be?

Well, it is because I am confident that, fortunately for the environment, different modes of prosperity are available. The core of that “sustainable prosperity” is a new universe of eco-efficient technologies. At the Wuppertal Institute for Climate, Environment and Energy we have sketched out the landscape of that new universe. In a book which I wrote together with Amory Lovins, I gave it the simple title “Factor Four”, with the subtitle “Doubling Wealth, Halving Resource Use”.

The book features fifty examples, from automobiles to household appliances, from buildings to logistics, from industrial processes to farming methods, all demonstrating that a factor of four is available in energy or material efficiency.

The factor four universe can be seen as the Promised Land to those who deal with climate change, urban sprawl and biodiversity losses.

But there is a difference again with classical pollution technologies. Waste water treatment technology can be introduced in a matter of five or ten years, depending on the life cycle of the economy’s capital stock. In buildings, it may take fifty years to refurbish the entire stock of houses. The complete renewal of the car fleet may take thirty years. And a reasonable and comfortable reduction of urban sprawl may take a hundred or two hundred years.

“Factor Four” can be seen as the solid rock of technological insights which we need when talking about pricing instruments that work on the second category of problems. If we want to avoid attacking prosperity we should be patient with the existing capital stock.

The long time frame can also be expressed in terms of price elasticity. You would not expect the car fleet to react to an abrupt price signal, unless it is a brutal signal. However, if society knows that energy and other resource prices will go up for a long time with no hope of their coming down again, companies will strategically invest in resource efficient technologies. Consumer education will make resource efficient behaviour a prime objective. Academic engineers and scientists will target the basics of resource productivity. And public planning will shift priorities towards convenient mass transport, agreeable high-density urban planning and high resource efficiency in public buildings, transport systems and disposal concepts. As a result, the factor of four becomes a realistic perspective for all sectors.

Long term price elasticity means that price signals should be mild but predictable. The best of all worlds would be a political all-party agreement over thirty or fifty years to raise prices for scarce resources in very small and predictable steps, preferably in steps so small that technological progress can keep pace.

Please note that I am talking about a price corridor, not a taxation corridor. Taxes or other instruments would be used to reach the price corridor. In this ideal case, the monthly bills for petrol, electric power, water, space, virgin raw materials remain stable and on average the population is not suffering any losses in their lifestyles.

If the fiscal revenues from this operation go into reducing indirect labour cost, you would expect positive effects on the labour markets. And compared to business as usual scenarios, you would see human labour services becoming gradually cheaper, i. e. more affordable for the beneficiaries of that labour.

So much for the ideal world. I felt it was necessary to talk about the ideal world in order to provide orientation in this conflictual theme of price signals on the basic commodities of modern life.

Let me at the end very briefly address some of the practical problems.

First, with reference to the EEB’s campaign motives and targets, let me clearly say that I support them. It will be, however, extremely difficult with regard to reducing internal farm subsidies; it may be possible, however, to reduce export subsidies of farm products. It is reasonable to demand ten percent of all taxes to be environmental and to make the operation fiscally neutral, ie not to increase the overall tax burden.

Regarding the time frame, it is EEB’s right to ask for rapid results, but as a politician I can tell you that our machinery works rather a bit slower. Perverse subsidies too are difficult to remove. They are consistently targeted at politically influential parts of the electorate. Transport subsidies in particular enjoy extremely strong support not only from the immediate beneficiaries but also from the automobile and aircraft lobbies. Moreover, they tend to increase economic turnover which politicians call growth even if it does not contribute to any quality of life. But it is turnover, not quality of life that creates jobs.

Let me say a practical or political word about the price corridor that I am asking for. It is, let me admit it, highly unrealistic in our days. It requires two unusual things at once: a fiscal policy that flexibly responds to world market signals, and an all-party consensus in one area, which is perhaps the favourite battlefield for political parties. Also, it should be said that the price corridor it not easily attained with emission trading and other pure market instruments. An adjustment mechanism may have to be introduced to avoid brutal jumps that can occur in the course of free market fluctuations.

On the other hand, if the public is convinced that this gentle price corridor is a fair deal and the best guide rail to the Promised Land, it becomes increasingly more plausible for political parties to go for it.

This then brings me to my concluding remark. It is essential that we create a strong vision of what is necessary to avoid disasters from fossil and nuclear energy use, from rapid biodiversity losses and from resources. If that vision also contains a realistic and agreeable strategy of how to get from here to there, you will have the people behind you.

PS:

• In the discussion, Dr. Iannis Paleocrassas mentioned that as Greek Minister of Finance he had introduced a fuel tax flexibly responding to world market fluctuations.
• A few days after the conference, the coalition agreement was adopted between SPD and Greens in Germany. It reaffirms the exciting energy tax escalator and foresees a general review by 2004 of the green fiscal reform, with a view to potentially develop it further and more comprehensively.

Further information about the Conference and the EEB can be found on the EEB’s website.