Germany’s heating plan: from green dream to red alarm

Dr Oliver Hartwich
30 May, 2023

For many years, Germany’s Greens had a good run. They kept increasing their share of the vote in elections at the federal and state levels. They enjoyed a sympathetic media. Their party leaders were personally popular.

It appeared inevitable that a Green politician would eventually occupy the Chancellery in Berlin.

But over the past few months, this seemingly endless Green honeymoon has come to an abrupt end. And ironically, it has ended because of the policies promoted by one of the party’s biggest stars, economics minister and deputy chancellor Robert Habeck.

Habeck does not come across as an ‘ordinary’ politician. Over the years, he carefully cultivated his image as a highly intellectual, thoughtful and sophisticated leader. Equipped with a doctorate in literary aesthetics, and after an earlier career as an author of children’s books, Habeck is the philosopher among Germany’s political class.

However, Habeck’s lofty political style and ambitions are now clashing with many German households’ cold economic realities. Or rather: with their heaters.

In his quest to speed up Germany’s decarbonisation, Habeck has set out to transform the country’s heating systems.

The sheer scope of Habeck’s proposal is mind-boggling. The target is to overhaul the heating systems of all of Germany’s homes. Every one of them would need to transition from oil, coal, or gas to renewable or low-carbon options. It is an undertaking of an almost wartime scale.

Unsurprisingly, practical concerns abound. First, there is the limited capacity of the construction sector. Not least because of the need to house a massive intake in refugees from Ukraine and the Middle East, Germany is struggling with a shortfall of about a million homes. Redirecting the resources towards replacing heating systems might exacerbate this problem.

In any case, installing modern, energy-efficient heat pumps is more complex and complicated than installing conventional gas units. There is a dire lack of qualified mechanics able to do this.

But even if engineers, technicians and tradespeople could be freed for Habeck’s grand heating plan, there is a second problem: the need for a significant upgrade of the electricity grid.

Habeck’s plan depends heavily on heat pumps, which work by extracting heat from the ground or the air. Heat pumps use electricity – lots of it – and would induce a substantial increase in electricity demand.

By some estimates, Germany would need a fifth more electricity to supply the new heating systems. And not just that: the country would also have to upgrade its grid. All this, incidentally, just as Germany has switched off its last nuclear power stations and is aiming to phase out coal and gas as well (and good luck with doing all that at once).

Still, the installation challenges and the surging electricity demand would not even be the most the most daunting aspect of Habeck’s plan. That is the astronomical financial cost it entails.

An average heating system overhaul can easily cost 30,000 Euro. Sometimes, that figure is a lot higher, especially for older buildings. It all depends on whether the existing insulation and radiators are compatible. About 30 million houses would be affected. Multiplying one figure by the other gives you somewhere around a trillion Euros. That is almost a third of Germany’s annual GDP.

To be fair, not all of these costs would come at once, but they are substantial regardless.

Even more troubling than these practical and financial issues is the scepticism of climate change experts and economists about Habeck’s initiative. This is especially so in the context of the European Union’s Emissions Trading Scheme (ETS).

The ETS employs a cap-and-trade approach to limit emissions, essentially assigning allowances to installations like power plants or factories. These allowances are progressively reduced, pushing companies to lower their emissions or purchase credits from more efficient peers. It is roughly what we have in New Zealand with our own ETS.

Several economists have publicly argued that Habeck’s efforts could disrupt this system. For example, Professor Veronika Grimm, a member of the Council of Economic Advisors, wrote in an opinion piece that preference should be given to emissions trading for heat and transport.

Germany’s aggressive push to cut emissions from heating could inadvertently make it cheaper for other European countries to pollute. This is a classic case of the ‘waterbed effect’, whereby pushing down emissions in one place causes them to pop up somewhere else.

But it is not just the usual suspects – well, economists – who are sceptical. Even Germany’s most prominent climate researchers are not convinced.

In a newspaper interview, Ottmar Edenhofer from the Potsdam Institute for Climate Impact Research advocated for emissions trading rather than prohibition. Edenhofer suggested that, rather than banning specific technologies outright, carbon dioxide emissions should be priced. This, he argued, would be sufficient to nudge people towards less carbon-intensive heating systems.

Given the severity of all these concerns, it is hardly surprising that Germans are by now highly sceptical of Habeck’s plans. In a recent opinion poll, 78 percent of respondents said they were against his policy.

For Habeck and his Greens, such widespread opposition will be a new experience. For years, they had been successful giving Germany one of the world’s most ambitious energy and climate policies in the world. Or one of the most foolish, depending on who you ask. The Wall Street Journal once called Germany’s setup the “World’s Dumbest Energy Policy.”

In the face of high inflation rates, a sluggish economy, and the ongoing economic implications of the Ukraine war, this may not be the time for ambitious, costly and utopian policies.

Perhaps there is a lesson from Habeck’s travails and his heating policy disaster. Voters are generally prepared to go along with policies to protect the climate. But there comes a point at which it is no longer enough only to have the right goals. That point is certainly reached when economists and climate change researchers agree there is a more cost-effective way of achieving emissions reduction targets.

Habeck will certainly ponder these questions. His Greens have scored only a meagre 13 percent in the latest opinion poll – a little more than half the support they had a year ago.

And not nearly enough for Habeck to pursue his dream of becoming Germany’s first Green Chancellor.

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