The Energy Transition in Germany, with Michael Pahle

Notable Quotes

• Measuring Germany’s progress on decarbonization depends on the goal: “I think for … substantially increasing the share of renewables, we are on quite a good track … Germany set itself a target of 80 percent power supply coming from renewables by 2030. In 2022, we were at 46 percent, up from 17 percent in 2010 … I’m moderately confident that we will achieve this target … When it comes to climate policy and the decarbonization targets, I’m not so confident … The Committee of Experts on Climate Change, which is an official committee mandated by the government to monitor progress in achieving these targets, found that we are not on track for the 2030 target, which is to reduce emissions by 55 percent compared to 1990.” (8:02)
• Sticks can complement carrots during a technology transition: “This is a really important lesson we learned from the coal phaseout: if you want to negotiate a transformation or a phaseout of a certain technology as a policymaker, when you have bound yourself to a long-term target, you have a very bad negotiating position, because the industry knows, ‘Okay, they need to achieve their targets; they’re going to pay us everything that we ask for.’ If you have a stick at hand, you can negotiate much better.” (16:16)
• Renewables are reliable: “A very important lesson from German climate policy is the fact that we have provided a proof of concept that an energy system with a high share of renewable energy works. I think we had a lot of advantages—we have a very good grid, for instance, which makes things easier for us. But still, we were ready, we engaged in this endeavor, and we managed it. There are no major outages, no major cost explosions whatsoever. It’s really going smoothly—much more smoothly than expected.” (26:45)

Top of the Stack

• “The Tragedy of Stopping Climate Change” by Jessi Jezewska Stevens

The Full Transcript

Kristin Hayes: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I’m your host, Kristin Hayes. My guest today is Michael Pahle, head of the Climate and Energy Policy Working Group at the Potsdam Institute for Climate Impact Research, known as PIK and based in Potsdam, Germany. Among his many responsibilities, Michael is the principal investigator on European climate and energy policy for a project known as the Ariadne Project, which is funded by the German Ministry of Science and is Germany’s largest social science Energiewende research project.

“Sorry, what type of research project,” you say? “What was that German word that you pronounced so poorly?” Well, that word is—I’m going to try it again—“Energiewende.” We’ll get there, but it essentially means energy transition. In the marvelous fashion of the German language—and I mean this; this is seriously one of my favorite things about German—they have created a single word to encapsulate the important, multifaceted concept of weaning the German economy off fossil fuels and transitioning to low-carbon energy. Stay with us as we discuss the goals and progress of Germany’s Energiewende. Again, with my sincere apologies for my pronunciation—I have a whole episode over which to improve.

Hi, Michael. Thanks very much for stopping by Resources Radio during your visit to the United States this month.

Michael Pahle: Hi, Kristin. Thanks for having me.

Kristin Hayes: Sure. For our opening get-to-know-you segment, which we always love to include, I would like to ask you two things. As an economist, what drew you to work on climate policy? Second, how do you really pronounce the word “Energiewende”?

Michael Pahle: Regarding your first question, which is the more difficult to answer, it was actually the other way around. In university, my graduate degree was in physics, and I was very much inspired by natural science. Then in the very last year, Ottmar Edenhofer, who’s now the Director of PIK, gave a talk on the use of economics for policy advice, especially for societal transformation and for the climate problem. I was so inspired that I decided to move on from physics to economics. I joined PIK in 2003, and I’ve stayed on since then, and it’s only become more fascinating. That’s my story of how I got into climate economics.

Regarding Energiewende, it’s pronounced Ener-gie-wen-de. It’s quite simple for a German word; it just has a couple of letters, actually. It can be much more difficult. Just to add—the literal translation is a “turnaround.” It’s not transitioning from one point to the other, but it’s like doing a U-turn, implying that something had been wrong in the initial decisions based on how things evolved. That’s quite an important aspect, and I think we can come back to this over the course of the podcast.

Kristin Hayes: That is very interesting context. Not just, “keep going from the point where you have started,” but actually stop, recalibrate, and go back in the other direction.

Let’s talk about Germany’s energy transition. I’m not going to use the word too many more times, because I don’t want to embarrass myself. But I will note that, as you’ve indicated, Germany really set about transforming its economy—decarbonizing its economy—with significant intention. This wasn’t something where the government was interested in letting it play out; there was a lot of strategy behind it.

But before we talk about that journey, I’d like to benchmark for our listeners the beginning point and the end point. Maybe you can say a little bit about when Germany began this process, and what the end state that the country is trying to achieve is. Either in terms of emissions goals, energy mix, or any other benchmarks and timeframes that they’re looking at.

Michael Pahle: In fact, the starting point is hard to pin down, because the idea of the energy transition and Energiewende was built over many years, if not decades. Historically, it goes back to the 1970s, to the oil crisis and the decision to build nuclear power plants in Germany. Then, over time, there was a considerable debate about the use of nuclear power and all the issues related to the peace movements. It was deeply embedded in the German political discourse and in part of the society. That built over a long time, and it was eventually reinforced with the Chernobyl incident in the 1980s, which was the founding moment for the Green Party.

The main objective of this party had always been to phase out nuclear power, because it was perceived as such a threat to society. It took another 15 years or so before this party came into power at the end of the 1990s. Then, in 2002, the important decision was made to phase out nuclear power within the next 20 years or so. That was really the first clear milestone that initiated the Energiewende or that made it practical—that moved it beyond the discussion to real policymaking. It all started back then. That was a major decision, but the political compromise behind it was brittle, so it was always questioned in subsequent years.

When a new government came into power—in 2010, if I remember correctly—that was more conservative, it decided to revoke or at least postpone the phaseout. Then, basically coincidental with this decision, Fukushima happened, and that produced another U-turn. So, a turnaround from the turnaround, so to speak, and then it was decided to phase out nuclear power for good. This is really what set it all in motion. The important part is that it was not just a decision to phase out—it was a parallel decision to phase in, because, when taking the decision to phase out nuclear power originally, it was clear that some technological alternatives would be needed, and these were renewable energies. The first steps to bring them into the market had started in 2002, but after the final phaseout decision in 2011, this really got serious and was scaled up considerably.

Kristin Hayes: Just to clarify, then, it sounds like the original impetus here really didn’t have to do with climate change at all. It wasn’t about emissions, it wasn’t about low carbon—it was about an energy transition that would take the country out of one fuel that was particularly problematic for the decisionmakers there. When did the climate lens get layered on top of it, if that’s a fair way to ask that question?

Michael Pahle: No, that’s a very good question to ask. There were, of course, expert circles that were very aware of the climate problem very early on—already in the ’90s—but this never became a big societal thing. It took until, I would say, the middle of the 2000s. A very important year was 2007, with the Stern Review, which got a lot of recognition in the Intergovernmental Panel on Climate Change report at the time, and that made a big impact—it increased awareness for environmental problems and the climate problem considerably. Over time, Energiewende as a notion turned from getting rid of nuclear to decarbonization and eventually deep decarbonization. Energiewende is now, so to speak, the backbone of German climate policy.

Kristin Hayes: That’s really interesting. Well, in broad terms, is Germany on track? Has that U-turn happened? Is that pathway between the 1970s and some distant goal around decarbonization happening?

Michael Pahle: I think for the first part of the vision—or the aim of the Energiewende—of substantially increasing the share of renewables, we are on quite a good track, I would say. Germany set itself a target of 80 percent power supply coming from renewables by 2030. In 2022, we were at 46 percent, up from 17 percent in 2010. It’s quite a remarkable increase. We have to do the same amount, the same increase, again in the next eight years. It will definitely be challenging, because a lot of the low-hanging fruits have been picked already, but the new government puts a lot of effort and political energy into this endeavor, and I’m moderately confident that we will achieve this target.

When it comes to climate policy and the decarbonization targets, I’m not so confident, I have to say. Just today, the Committee of Experts on Climate Change, which is an official committee mandated by the government to monitor progress in achieving these targets, found that we are not on track for the 2030 target, which is to reduce emissions by 55 percent compared to 1990, which is quite ambitious, one has to say. But this is not going in the right direction. The problem is not energy—as one could assume, knowing that we are on a good track for deploying renewables at large scale—but all the other sectors, basically, which are the tedious and hard-to-abate sectors.

Kristin Hayes: In the power sector, is there a similar desire to decarbonize the electricity sector and then electrify a number of other sectors, as is often discussed here in the United States? Is that the notion underpinning progress overall? It sounds like there’s been progress on the power side—lots of renewables have come in, but that hasn’t yet filtered out into the other sectors. Is that a fair characterization?

Michael Pahle: Exactly. The idea is to increase the share of clean power and then to electrify the other sectors. On paper, it looks quite straightforward, but it’s extremely difficult, because it needs to be complemented by other measures—energy-renovation measures in the residential sector and lots of measures that bring the old stuff out of the market—and this is where it’s getting complicated. In the long run, it might play out. But in the mid-term, it’s really hard to make progress just looking at the clean energy supply side.

Kristin Hayes: Let’s talk about measures. Let’s talk about the drivers of the energy transition. I’m thinking particularly how at RFF we sometimes talk about policies, in particular, in terms of carrots and sticks. I will very coarsely define “carrot policies” as those that incentivize a desired behavior. For example, using subsidies or tax credits to lower the cost of renewable energy and therefore bring more renewable energy into the energy mix. “Stick policies,” on the other hand, are those that actually disincentivize an undesired behavior—putting a price on carbon or making carbon emissions more expensive. I wanted to ask, what is Germany’s mix of carrot and stick policies these days?

Michael Pahle: To some extent, we are at the branching point. In recent years, we have mostly used carrots and not so many sticks, which is typical for the first phase of ambitious climate policies. I’m making this remark with a view on the Inflation Reduction Act, which has substantial carrots in it and few sticks, as I understand. This is the way the German climate policy evolved to the state it’s in today. What has made things easy is a very high willingness among German taxpayers to pay for such measures. We have created a climate transformation fund that was newly set up when the new government took power, and it’s endowed with around €180 billion for just three years. That’s a remarkable amount, and I think that compares, if I have the numbers correct, to about 50 percent of the investments that come with the Inflation Reduction Act. That’s quite remarkable.

At the same time, I do see the lack of sticks as a problem; and also the way that this money is spent. The money is spent for carrots. We did some analysis for the German residential sector and looked at the energy-efficiency measures in more detail. Most of the money from this fund goes into energy-efficiency measures. We concluded that most of it is spent in what we would call “good faith.” There is the idea that all sorts of energy-efficiency measures eventually serve the purpose—which might be right, but not all of them are cost-effective, and there is little interest in doing evaluations. I see a big risk that a lot of the money we have—and it is a lot, but it will not be endless—is not spent in a cost-effective way and then will be wasted to some extent. This is really one of the major concerns I have with climate policy in Germany at the moment.

Kristin Hayes: I could ask you lots of questions about that. Certainly, having worked with economists for long enough now, I understand that emphasis on cost-effectiveness is not just an end in and of itself, but it really is designed to encourage future adoption of similar investments. So, if that first round of money doesn’t actually lead to emissions reductions or significant emissions reductions, people are in fact less likely to continue funding something like that. The cost-effectiveness is actually critical for the longevity of the investment of the policy. That’s something that I think has really stuck with me about why cost-effectiveness is a really critical measure to think about.

You mentioned that there aren’t many sticks—that it’s been mostly carrots in this first phase. Yet, Germany does take part in the European Union’s Emissions Trading System, is that correct? That’s a price on carbon. I would characterize that as a stick. How does that overlay on top of the other policies that Germany has put into place?

Michael Pahle: It’s a very complex interaction, I have to say, because this European cap-and-trade system was set up in 2005, originally, to fulfill the obligation of the Kyoto Protocol. At that point, it was a very marginal policy, so it was put on top, so to speak, on the European level, and it created a carbon price that did not have a big influence back then. It went up in the first years from, initially, something like €5 per ton to €30 per ton, but then later on plummeted and stayed at a very low level. This happened for a variety of reasons. First of all, because European climate policy was not ambitious enough, it lingered and was dormant for quite a long time. Then, people—especially politicians who were very keen on advancing climate policy—lost faith in it, saying, “Okay, we put a lot of effort into creating it, and now it’s not going to help us.” It was a bad investment, so to speak.

Then, that changed, luckily, because Europe caught up in terms of ambition. There’s usually some iterative process between the state level and the federal level, speaking of Europe as the federal level and the state level being the nation states in Europe. There was much more progress and much more ambition among several of Europe’s member states, so cap and trade could not catch up or was too unambitious to really make a difference. But, then, Europe caught up.

It’s quite interesting to see, because there’s a love-hate relationship with the Emissions Trading System. It’s hated, because it puts pressure on national policymaking. For instance, you want to decarbonize the industrial sector, but you want to do so at your own pace, taking more time. Basically, within the course of two years, you have a substantially rising carbon price, which puts considerable pressure to decarbonize the industrial sector, which would be just too quick for you, because you need to catch up with complementary policies.

At the same time—and this is a really important lesson we learned from the coal phaseout—if you want to negotiate a transformation or a phaseout of a certain technology as a policymaker, when you have bound yourself to a long-term target, you have a very bad negotiating position, because the industry knows, “Okay, they need to achieve their targets; they’re going to pay us everything that we ask for.” If you have a stick at hand, you can negotiate much better. So this is where the love comes in, I would say. I think German policymakers recently have learned to love the Emissions Trading System more than they did in the past.

Kristin Hayes: Interesting. How much staying power would you say that primarily the carrot-type policies have across changing governments in Germany? Has there been pretty consistent support for the package of changes that we’re talking about, no matter which party or political persuasion is in power? Is this fairly fixed?

Michael Pahle: It’s not easy to judge the durability of this intention to spend heavily. The fund that I mentioned was graded for three years, which is the time frame of the current government. I think they did this with good intentions, and it certainly helped that the Green Party is part of the government coalition. I think when the next government comes up—and the Green Party will not be part of this coalition—this might change. This only emphasizes the need to be aware and to look at cost-effectiveness, because there’s this feedback effect that you mentioned.

If you spent heavily in the first round, and then you realize it was not spent well, then people might become more reluctant to again mobilize substantial public funds. In the past, the German population and society was willing to turn a bit of a blind eye on that and say, “Okay, we just need to get the process started. Maybe in the first phase you can look more at efficiency rather than cost-effectiveness.” But as things progress and become more ambitious and much more costly, cost-effectiveness is really of the essence to sustain this heavy spending through the different governments.

Kristin Hayes: Interesting. I want to pivot just a little bit. Certainly, the conversation here in the United States about the energy transition involves thinking about workers, shifts in jobs, workers across industries that are merging, and those that might be phasing out. I feel like I have a notion that Germany has actually been investing heavily in that piece of the puzzle, as well—thinking a lot about the worker and employment-transition piece. Is that a fair assessment? What would you say about how Germany’s been approaching that piece of the energy transition?

Michael Pahle: It has always been an integral part of the discussion. I think this is the case in basically every jurisdiction, because it’s very hard to do a policy where jobs are displaced, especially in Germany, which has such a strong industrial base. There’s always a keen eye on not endangering this industrial base, and the jobs related to it, because this is what they would call—or what some people would call—“good work.” It’s paid well, and it’s a highly qualified job, so you would not want to lose it.

In the first stage, it was relatively easy, because it was about the creation of the renewable energy industry, and this was all about job creation. There are just good stories to tell. Some job strategies worked out better than others, depending on the technology, but that was all positive news, so to speak.

But now, when you have to tackle getting the dirty technologies out of the market—for instance, as we did with coal, phasing it out—it’s clear their jobs will be displaced or lost. The German way of handling this is very resource-intensive, I would say. A lot of money was used to compensate and to pay out structural aid to provide additional qualifications for workers. There was substantial support, which in principle is a good thing to do, of course, because it cushions the job-loss effects of phasing out the technology. But then, most of the money that went into funding and financing the coal phaseout went into these structural-aid measures.

There are a lot of jokes saying—I don’t want to use the C-word here—but there’s a lot of planning, a lot of money spent on things that really do not pay out in the long run. This is Germany’s way of ending that. I’m worried that extrapolating this to other industries can become a real problem. It will not work out when you do the same thing for the steel industry or the carmaker industry. There are so many jobs there, and they are also at risk when there’s a large-scale move to electromobility, because this is not what we are good at. We do have other competitive advantages in Germany, and we cannot afford the same strategy again if it’s at such a large scale.

Kristin Hayes: Yeah. That’s a very important part of the conversation here—how to navigate the timescales on which those switches are happening. I have to say, too, that I think of Germany as a country that is considerably better than the United States, at least, in investing in vocational training, in training in general, and in different types of education, and it has a broader base of technical colleges, places that are set up well to provide new skills, retrain, and things like that. Has that been an asset in this process for Germany? Is the educational infrastructure particularly well-designed to help with some of these worker transitions?

Michael Pahle: I think the way in which vocational training is organized certainly helps, and there’s a lot of infrastructure that can support this—not just vocational training, per se, but the way in which jobs can be relocated or new jobs can be found. There’s a lot of government infrastructure that supports this. I think that played to Germany’s advantage. But at the same time—and I’m a bit cautious to say this—I think it’s a piece of the puzzle.

In Germany, expectations of what government should do for you are relatively high, so you have to get used to all these training offers, the transfer system, and so on. If there would have just been a simple message of, “Okay, your job is gone,” this would have meant a major conflict, because this also is tied to the political system. Coal jobs are very much concentrated in two or three of the German states, and this mobilizes the heads of the states very actively in political negotiations. There were a number of bottlenecks that made it necessary to go this way. But at the same time, you’re right—I think it’s definitely of help to have an infrastructure that can support or can help in this transition, especially for workers and for new vocational training.

Kristin Hayes: Okay. Well, I know you’re someone who’s been following this transition closely, and, in general, you’ve referenced a little bit about where you see some challenges emerging around cost-effectiveness, around moving from electricity-sector decarbonization to these harder-to-abate sectors. Where else do you see the greatest challenges having emerged? That could be within the country or, certainly, there have been plenty of external forces facing Europe these days that may have come into play, as well. Where has the country really been challenged to meet its goals?

Michael Pahle: In Germany, as in several other European countries, we are now at the point where climate action is really getting serious. In the past, we did some decarbonization. We always had ambitious goals, but we never really had the instruments to follow through and be able to deliver these goals. This is changing now—more sticks are coming in. With this happening, one example to provide is that there is a new law that will practically ban the use of oil and natural gas heating systems from next year on for new buildings, or you are mandated to replace your old heating system if it’s 30 years old. That’s quite some stick, and a lot of people are getting angry about it.

I’m bringing this up as an example, because it reveals that there is a substantial discrepancy between the stated support for climate action—which has always been very high in Germany—and the actual willingness to pay for it and to potentially also make sacrifices. The question is, What kind of problem is this? Is it an economic problem? Is it a political problem? Or is it a broader societal problem that the bulk of the people have the expectation that you can do ambitious climate policy, but at relatively little cost?

This was the communication strategy of many policymakers, if not all of them, in the past. It’s understandable, because you need to motivate people to engage in such endeavors, but then there’s pay time at some point, and it confronts the communicative strategy or the narratives that were used in the past. I think the country has to find a way to deal with this to get out of this discrepancy and make people ready for the necessity to make some sacrifices and to pay a lot of money for really achieving this goal, which is, of course, very important to do.

Kristin Hayes: All right. We’re getting a little low on time, because I keep asking you questions, but I find myself—particularly when I talk to folks in other countries who have approached the transition on a different time frame with a different level of ambition than the United States—thinking a lot about transferability of lessons from one jurisdiction to another. When you think about Germany’s experience, which we’ve been talking through, which lessons from what the country has achieved are, in fact, transferable to other places? And which factors, policies, or considerations would you say might, in fact, be unique to Germany, and not necessarily something that another country could look to learn from?

Michael Pahle: I’ll aim for a shorter answer now to make up the time that I overused.

Kristin Hayes: Nope, it’s me. I’m the one yapping away.

Michael Pahle: What is a very important lesson from German climate policy is the fact that we have provided a proof of concept that an energy system with a high share of renewable energy works. I think we had a lot of advantages—we have a very good grid, for instance, which makes things easier for us. But still, we were ready, we engaged in this endeavor, and we managed it. There are no major outages, no major cost explosions whatsoever. It’s really going smoothly—much more smoothly than expected.

Kristin Hayes: Even with the phase-out of nuclear and coal, two types of baseload power?

Michael Pahle: Well, we will see with that. But there were still just three nuclear power plants remaining, so they had only, at this point, a relatively marginal effect on the oil system’s stability and operation. We will see how it will turn out with coal, because slashing out one technology after the other, of course, becomes more challenging. Also, gas was originally conceived as a bridging technology, but it’s now much more controversial, also, with a view on the Ukraine crisis. We will see how things go. It’s definitely necessary to increase the pace with which renewables are deployed and scaled up. But I think it has worked well—as I said, no major problems with regard to security, or cost explosions, or anything like that. Given the preconditions or initial situations Germany is working with here, we are applying Teutonic rigor with this Energiewende.

We have a lot of engineering talent, so if it would not have worked out in Germany, I think this would have sent a very bad signal to the rest of the world, in terms of whether this is actually feasible. Also, what we did in terms of supporting solar power in the first years—so up until 2010—by and large, I think that was a really substantial benefit for the rest of the world, having sustained the development of the technology at that point and created a lot of spillovers, especially with innovation.

The one thing I would say is not transferable is that a lot of the things that we are doing we can only do because we have such substantial political support and a lot of money that allows us to take measures that are probably not feasible—or that are very likely not feasible—in the rest of the world.

I was mentioning the coal phaseout and why I think, in general, it’s a good idea to pay structural aid to compensate and help workers transition. If this were to be a blueprint for the rest of the world, climate policy would be extremely costly.

Then again, at this point, we do have to make it clear and find a new way to establish that some sacrifices are needed. If you look at the historical incidents of transformation, like the Industrial Revolution, that always came with sacrifices in the short term but turned out much, much better in the long term. I think it’s hard to avoid that there are losers, and, for the time being, Germany’s ignoring this. I think this is really the part of the idiosyncratic way that Germany is handling things, especially in the phaseouts. I think this can now serve as a blueprint or as a lesson for the rest of the world. Maybe it can serve as a lesson on how not to do it, but I would not go that far.

Kristin Hayes: Well, all of those lessons are relevant, and I certainly do appreciate how much Germany has been a leader in some of the technology development and that it has, in fact, benefited other countries, as well.

Well, we are at the end of our time, so I will close our recording by thanking you, first of all, for taking the time to talk with me. Also, I wanted to invite you to share other good content that you might want to recommend to our listeners. We refer to this segment as Top of the Stack. Michael, what’s on the top of your stack?

Michael Pahle: My recommendation is not a piece of economic work—it’s an essay written by a writer, actually. It’s called “The Tragedy of Stopping Climate Change.” It’s an essay by Jessi Stevens that was published in Foreign Affairs in 2021. As I mentioned, Jessi’s a novelist and a writer. In this essay, she reflects on the role her profession could play in telling the climate story—what writers should do and actually what stories there are to tell. What I really like about this essay is that it’s quite open-ended, so it raises more questions than it answers. I found this extremely inspiring. I’ve come back to this piece several times since it was published in 2021. For everyone who thinks on a very high level, on a very general level, about how we live through this problem, how we think it should be communicated, and which questions we ask ourselves, I definitely recommend reading this piece.

Kristin Hayes: Great. Well, we will put a link to that, with the transcript of our episode, so that readers can take a look. Thank you, again. It’s been a pleasure.

Michael Pahle: Thanks so much.

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