The author is the German finance minister
German industry and society have once again proven to be more resilient and adaptable than certain people feared. Scary scenarios of dangerous energy rationing or a major downturn in our economy are often misrepresented. But we are nowhere. With a challenging year behind us, this is good news – not only for Germany, but also for Europe.
Companies and households react quickly to the increase in energy prices. They install more efficient heating or production facilities, switch to alternatives and import intermediate products. The results are encouraging: German households and businesses have significantly reduced their gas consumption, despite the cold weather. From the beginning of the war in Ukraine until mid-December, industrial gas consumption in Germany was (temperature adjusted) about 20 percent lower than the average level of the previous three years. Although some companies have reduced production, especially in the energy-intensive sector, the overall industrial output will only decrease by about 1 percent from the beginning of 2022. In addition, in a survey released by the Ifo institute in November, over a third of German companies see the potential to reduce consumption more gas without danger of output.
Instead of imposing excessive laws and regulations, we rely on price signals and the concerns of market participants to create the right incentives and reduce gas consumption.
We will follow this approach in the coming months, when energy savings remain important. The latest relief measures will not distort price signals. For this purpose, the Bundestag approved gas and electricity price brakes in the last session in 2022. They are designed to function without intervention in the market or prices. This system will pay a fixed amount relative to the previous year’s consumption and the current difference to the reference price – regardless of current consumption.
The energy price brake is the main component of Germany’s “protective shield”, in which up to €200bn is available for measures in 2022 to 2024. Seen in relation to the size of the German economy, it is highly dependent on Russian energy imports and the fact that the measures will expire in 2024 , this is a balanced and useful mechanism. Unlike instruments used in other countries, our new arrangement will not affect the price formation process driven by supply and demand, or incentives to save gas. Companies and households will continue to save on market prices while reducing consumption by gas or electricity units. In this way, the price brake also avoids additional demand for gas at the expense of consumers in other European countries. No one needs to fear that competition will be distorted or gas will be bought. Indeed, a recent IMF working paper on cushioning the impact of high energy prices on households clearly praises Germany’s energy price brakes.
Current developments confirm the effectiveness of market-based approaches – and show that we also need to rely on price signals when it comes to reducing CO₂ emissions. Last year, households and companies only had a few weeks to adapt, but we have already seen a strong response. The effect of the CO₂ price can be even stronger, as adaptation can take longer and also affect long-term expectations and decisions. Regulatory interventions and subsidy schemes, even if well targeted, cannot compete with market coordination and incentives that support individual decision-making and promote innovation.
Europe and Germany can overcome this crisis without the collapse of industrial production. We also have the opportunity to efficiently deal with climate neutrality. In both cases, we need to have faith in price signals as well as in the power of people and businesses to innovate and adapt.