Professor Hans-Werner Sinn is President of the IFO Institute for Economic Research (since February 1999), Director of the Center for Economic Studies (CES) at the University of Munich (since January 1991), and Professor and chair of economics and public finance at the University of Munich. Since 2006 Professor Sinn has been President of the International Institute of Public Finance.
The following is a summary of a lecture by Professor Sinn on the challenges of climate change.
Up to now the climate discussion has focused one-sidedly on the reduction of demand for fossil fuel and has neglected the supply side. In his Thuenen Lecture at the conference of the Verein für Socialpolitik, Ifo president, Hans-Werner Sinn, points out that supply and demand together determine how much fossil fuel is extracted and thus also determine the pace with which carbon is released into the atmosphere, creating the greenhouse effect.
The EU's consumption reducing measures are, in his opinion, in vain if the oil sheiks and the other owners of fossil fuels do not cut back their supply. The effect of measures like those of the EU are then not only small but non-existent. As Sinn explains: "With the rigid conduct of the suppliers, the world market price is pushed so far under the level that otherwise would have been achieved so that those countries that do nothing with regard to climate protection will use that much more fossil fuels than that which is saved be the EU. The Chinese continue to step up their CO2-intensive expansion policies and the Americans drive even more SUVs than they used to."
The improvement in housing insulation, the conversion to biodiesel and the construction of cars with lower fuel consumption will be just as useless as windmills or solar roofs, with which electricity and heat is to be generated in Germany, if the oil sheiks remain stubborn. Also France's nuclear reactors would then also make no significant contribution. All these forms of energy would only come in addition to fossil energy. "It is not Angela Merkel who will determine the pace of global warming but Hugo Chávez, Mahmud Ahmadineschad, Putin's oligarchs, the Arabian oil sheiks and a few other potentates."
A reduction of the resource supply via a restriction on consumption by industrial countries is hardly likely, in Sinn's opinion. The supply of fossil deposits that nature has made available is independent of the price reactions that the consumer countries can influence. Sinn doubts that price-reducing measures can induce the suppliers of fossil resources to defer extraction. The supplier reactions that do occur depend on the temporal course of the demand restrictions that the suppliers expect. Indeed it is true that demand restrictions today that are not continued in the future induce the suppliers to defer extraction. However, demand restrictions expected in the future would give them the incentive to extract more in the present. What in fact happens depends on how much demand restriction is implemented in the present and how much is realised and expected in the future.
If there is to be a slowing of resource extraction, the demand restrictions must be eased over time so that the resource providers have an incentive to defer their extraction to a point in time when higher prices can be achieved. "That, however, is hardly possible in reality", Sinn observes. It is more likely that with increasing global warming the demand for policy measures will become increasingly louder, so that in all probability the measures will not be weakened further on but intensified. Since the resource providers would know this, they would anticipate this development with intensified extraction. This could be one of the reasons that world consumption of fossil fuel and the output of carbon dioxide in recent years, despite the expansion of EU environmental protection measures, has increased even further. Sinn speaks here of the "green paradox" of environmental policies.
Policy measures that are truly effective in reducing global warming are rare and have little in common with that which is currently demanded by governments and is publicly discussed in Germany and the rest of Europe. "Meaningful measures include the introduction of worldwide source taxes on capital gains along with a closing of tax havens so that the resource owners would lose their investment alternatives", Sinn explains. In addition, an emissions trading system with no loopholes that would unite all customer countries into a worldwide monopsony* could force the desired amounts from the resource exporters. It would make particular sense to exploit the technical possibilities of sequestering mineral oil. "Rebuilding the forests should have highest priority, however, because forests are the largest storages of carbon on earth that can be controlled by humans", Sinn emphasises. Currently deforestation is leading to the release of more carbon dioxide than from the whole transportation sector. If reforestation were to replace forest destruction, global warming could be slowed down significantly.