Germany, the United States, and Climate Leadership in a New Age of Oil

Source: American Institute for Contemporary German Studies

Introduction

The American adage “only Nixon could go to China” has become enshrined in political history, referring to the ability of a politician to undertake actions or reforms seen as difficult and against the traditional interests of his or her ideological constituency. It also captures the unusual, at times perplexing way in which Germany has grown into a role as arguably the world’s leading industrial country on the issue of climate change. Against expectations, successive conservative governments—and even Chancellor Angela Merkel herself—have shaped the modern climate regime from the beginning.  It is a story which begins further into the past than many realize, and a role for Germany which requires revitalization and rejuvenation as the global economy and global climate discussion undergo significant upheavals in the decades ahead. A combination of science and necessity have opened up new pathways for U.S.-German cooperation on climate issues, and in particular on issues relating to oil and transport, but it will ultimately be up to the courage and creativity of each country’s leadership to seize upon these issues and pull the U.S.-German partnership on climate change into the twenty-first century. 

History

 Starting in the 1980s under a conservative coalition government formed by the Christian Democratic Union (CDU) and the Free Democratic Party (FDP), Germany’s government, despite its stance as avowedly pro-economic growth, began calling for an ambitious and binding global climate framework to be housed under the United Nations.¹ In 1987, CDU chancellor Helmut Kohl declared climate change to be the world’s most “pressing environmental problem,” and three years later an official declaration followed stating the government’s intent to reduce carbon emissions 25 percent from 1990 levels by the year 2005. Even amid the significant burdens of the reunification process starting in the 1990s, the climate action push of the German government continued unabated, and to some degree the “ecological” mindset was even used to rationalize the imposition of much-needed energy efficiency measures throughout the former East Germany.²  

As environment minister under Chancellor Kohl, Angela Merkel played a key role in hosting the very first Conference of Parties of the UN Framework Convention on Climate Change (UNFCCC) in Berlin in 1995. It was at this meeting that a permanent secretariat for the UNFCCC in Bonn was agreed upon, and a key precursor to the Kyoto Protocol—the so-called “Berlin Mandate”—was quietly brokered by Merkel.³ The following year, Merkel’s signature also appeared on the declaration by the European Council of environment ministers that “global average temperatures should not exceed 2 degrees above pre-industrial level,” becoming the first global political body to lend support to the canonical 2 degree target.⁴ 

The Kyoto Protocol was later conceived in 1997 and by the time it finally came into force in 2005, Germany had voluntarily undertaken the largest share of the EU’s greenhouse gas (GHG) emissions reduction burden. When Merkel was elected chancellor in late 2005, it was assumed that the new CDU-SPD coalition government would de-prioritize the environment, putting jobs and economic growth in the foreground. Surprising both supporters and critics, Chancellor Merkel’s government has for nearly a decade pressed ahead with putting climate change at the forefront of domestic policy reforms and international engagement, even as coalition partners from across the political spectrum (the FDP and now once more the SDP) have cycled out and in again. 

At home, the implementation of the enormously ambitious Energiewende project has set a new standard for policy-driven renewables and energy efficiency deployment, even as a brief renaissance for coal power, as well as the acceleration of Germany’s long-planned nuclear phase-out, have been met with skepticism from some who have difficulty reconciling the realities of the country’s energy sector evolution with its high-minded rhetoric of decarbonization. 

The global financial crisis of 2008/2009 and the lingering European economic malaise have also begun to temper the once world-leading ambitions of the German government on climate action, and the newest policy initiatives out of Berlin—including a watered-down set of carbon regulations for polluting power plants—have drawn criticism even from ministers within the chancellor’s own cabinet.⁵ The imperative for compromise, particularly in a coalition as diverse as the current SPD-CDU one, is oftentimes high, and as a result the burden on the electricity sector to meet Germany’s ambitious climate goals will be reduced, placing ever greater expectations on the transport sector and the petroleum value chain. 

It is beyond German borders, however, where Chancellor Merkel’s imprint on the global climate change conversation has been the most unambiguously transformative—and positive—over the past ten years. The G8 (later G7) has been a key fora for such agenda-setting. In 2007, Merkel surprised many at the G8 summit hosted in Heiligendamm by insisting on climate change as a top issue of discussion and in the same year led the charge for the EU to accept binding GHG emission targets, earning her the moniker “Klimakanzlerin” (climate chancellor) from the German press. With the pivotal Paris climate summit approaching at the end of 2015, Merkel is once again carrying the climate banner in the hope of impacting the pace and content of international negotiations. At the Petersberg Climate Dialogue in May 2015, she promised that Germany would double its contribution to international climate financing by 2020, a political down payment on what German leadership hoped would be a far more impactful outcome at the G7 summit in Elmau the following month.

They received their wish, as G7 leaders agreed to “decarbonise the global economy in the course of this century” by phasing out fossil fuels.⁶ The decision received top headline treatment from a number of world newspapers and was labeled by many as “historic,” but self-satisfaction over the grandeur of the text has led to significant uncertainty over its implications: how will the G7 members transpose this gargantuan task into actionable policy measures? How will they hold one another accountable amid the inevitable gyrations of leadership in these key Western democracies? And finally, where might they cooperate and converge?

When considering the role of the U.S.-German relationship against the backdrop of the G7 decarbonization declaration, it is clear that the institutions, approaches, and strategies for climate cooperation between the two are outdated and poorly coordinated. 

The power sectors of each country are highly idiosyncratic and largely localized, with the fate of the U.S. electric grid to be determined by the Obama administration’s Clean Power Plan and the fate of the German grid to be determined by the continued evolution of the Energiewende and aforementioned power plant carbon regulations. Some cooperation will be possible, but it is a mature and highly contextual set of issues. In industry, the sheer scale and pace of change being brought about by the internet, remote sensing technologies, and intelligent automation ensures untapped opportunities for collaboration—and even healthy competition—between the U.S. and Germany in identifying ways to shrink the carbon and energy footprint of industrial activity. 

However, it is in the world of petroleum where the greatest unexplored and untapped opportunities for new partnerships exist, with benefits that cut across economics, security, and environmental challenges. 

The Centrality of Oil

No energy resource highlights the complexities of the energy trilemma—balancing security with affordability and environmental sustainability—nor invite such diverse responses and policy approaches from world governments, as does oil. The United States and Germany have had this fact repeatedly woven throughout their industrial histories. Black gold persists as a commodity whose future is of paramount importance for boardrooms in New York and Frankfurt, for ministries and departments in Washington and Berlin, and for the global millennial generation that will soon enough inherit a world replete with technological, cultural, and environmental change. 

Oil is the single largest energy source for both the United States and Germany, though this is often forgotten, overshadowed by coal in conversations on climate change, or by gas in conversations on energy security and geopolitics. As industrial superpowers and key axes of the automotive industry, the United States and Germany have for many decades seen their economies as inextricably linked with the ups and downs of the global oil market. 

And yet, through regular energy crises—the closing of the Suez Canal in 1956, the Arab oil embargoes of the 1970s, the growth and subsequent stigmatization of nuclear energy—both the U.S. and Germany have thrived, proving remarkably resilient despite their status as the largest oil importers on their respective continents. The United States has done this with innovation and profligacy in both oil production and oil consumption, while Germany has achieved it despite being home to not a single international oil major nor any significant reserves of crude oil. 

In understanding how this is possible, as well as the role that oil will play in both powers’ future, a more nuanced perspective is needed. In short, it is the evolution of the oil intensity of the American and German economies that has underwritten their robustness to market swings, and it is this continued evolution, along with the carbon intensity of their oil use moving forward, that together offer many untapped opportunities for joint global leadership on oil governance in the twenty-first century. 

Oil Intensity

The oil price shocks beginning with the Arab oil embargo of 1973 came as a surprise to many oil-importing developed countries. Exposed for the first time to broad dependence of their economies upon inexpensive, globally-sourced crude, OECD governments pursued various diversification strategies over the ensuing decade. France pursued a state-led expansion of nuclear power for its electricity sector; Italy increased its coal imports from nearby producers; while the U.K. and Norway encouraged increased oil exploration and production from the North Sea. 

In Germany, the government banned the use of oil for electricity generation and began actively subsidizing domestic coal production,⁷ while in the United States, new restrictions were placed on the use of petroleum in the electricity sector and the upstream oil industry was deregulated and given tax benefits to encourage domestic production.

Almost all of these strategies pertained to either reducing the amount of oil used in the industrial and power sectors on the one hand, or increasing the domestic production of oil on the other. Across multiple geographies, apart from new vehicle fuel efficiency standards in a number of countries, very little was done to reduce the oil intensity of the transport sector. 

Figure 1

Data Source: IEA

From 1973 to 1987, the industrial sectors of IEA countries (a grouping of developed oil importers) saw an oil intensity drop of 66 percent, while the household and commercial sector saw a likewise significant drop of 40 percent (Figure 1). These are particularly impressive numbers given the durable, long-lived nature of infrastructure and equipment in these sectors, though some of the decline may be due to a decline in economic growth over the period that would be expected to disproportionately impact energy-intensive activities. The decline in the transport sector’s oil intensity, approximately 4 percent, pales in comparison, underscoring a historical lack of viable, cost-effective alternatives to oil-dependent infrastructure and fixed capital. 

The United States even experienced backsliding in the oil dependency of its transport sector for a number of years as improvements in vehicle fuel efficiency standards were frozen for two decades ending in 2005 and gasoline taxes have remained constant since 1993 without inflation-indexation, allowing a proliferation of SUVs, Hummers, and other large vehicles to drive oil demand in the United States to a record high in the mid-2000s.⁸  

Yet, even without major contributions over the past several decades from the transport sector, the broader economies of the United States and Germany have continued to see a significant reduction in oil intensity. It is for this reason that the two countries, though different in many ways, have weathered equally well the dramatic oil price swings of the past half century. 

A brief analysis is instructive. When looking only at nominal prices, the swings are mind boggling. The crude oil price increased more than sixty-fold, from $1.80 in 1970 to $112 in 2012. However, two key adjustments are required. The first is intuitive and well-known: an adjustment for inflation to arrive at constant, or “real” prices. This adjustment reveals the price swings to be less dramatic yet still significant. It is the second adjustment, one that accounts for changes in the oil intensity of the economy, that yields the greater insight. 

The oil intensity of the economy can be defined as total domestic oil consumption divided by real GDP in a given year. This calculation yields a multiplier that, when applied to the annual price of oil, reveals the importance of the U.S. and Germany’s increasingly efficient usage of black gold in their economies. The 1970s oil price spikes can still be clearly seen, but the raft of measures introduced thereafter have ensured that the inflation and oil intensity-adjusted oil price has maintained remarkably low and stable from the mid-1980s until today (see Figure 3).

Figure 2:

Data Source: BP Statistical Review of World Energy 2015, World Bank

Of course, the historical data in the graph above ends at 2015, and thus does not capture fully the historic collapse in crude prices now turning the oil industry on its head. Prices have at times approached levels just one-third of their highs last year, with the danger that prolonged low prices may reverse the prolonged trend for the economy of declining oil intensity, particularly in the United States where petroleum product prices are not buttressed by high levels of taxation. 

Already, there is evidence of such slippage. Gasoline sales in the United States rose by the fastest level in over a decade in July 2015, and low oil prices may also hurt the competitiveness of alternatives such as biofuels and electric vehicles. As oil intensity climbs once again, the economies of the United States and Germany are exposed to inevitable future volatility at greater magnitude.

Where, then, might the two countries cooperate to jointly promote continued reduction in the oil intensity of their economies and shared progress toward climate goals? 

Today’s Approach

One popular response has been to continue to promote the deployment of alternative transport technologies such as biofuels, hybrids, and electric vehicles, through subsidies or mandates on automakers. Yet these approaches all have their limits, and it is not as easy as many have surmised to say “auf wiedersehen” to carbon-based fuels.

Biofuels have promise in many specific contexts, but an over-emphasis by policy on first-generation biofuels has raised many complex issues around indirect land use change, global food prices, and the climate benefits of such fuels. Automobile manufacturers can only move so fast to revamp their entire product offering in response to policy signals, and this process involves massive investments with global spillovers. Electric and hydrogen fuel cell vehicles, though extremely promising over the long term, have plentiful challenges competing in today’s low oil-price environment without heavy subsidization. The relatively high costs of unlocking truly decarbonized alternatives to conventional transportation technologies, particularly when compared to physical capital in other sectors, is visible in Figure 3.

Figure 3

Data Source: Adapted by author from research by Stockholm Environmental Institute

Even hybrid vehicles, which offer a far more efficient path for the petroleum-based economy, are not alone sufficient to ensure a meaningful climate impact. 

For example, Toyota announced last year that it had sold 2.4 million Toyota and Lexus hybrids throughout North America, saving approximately 500 million gallons of gasoline every year.⁹ If all of this gasoline were refined from the oil in the Carnegie Endowment’s “Oil Climate Index” (OCI) with the lowest GHG-per-MJ of petroleum product rating (Norway Ekofisk), it would point to a savings of 4.8 million metric tons of GHG savings per annum.¹⁰ For context, this is less than one-quarter of the annual greenhouse gas emissions from the most carbon polluting coal plant in the United States (the Scherer plant in Juliette, Georgia) and roughly one-sixth that of the most polluting coal plant in Germany (the Neurath plant in Grevenbroich, Northrhine-Westphalia).¹¹

However, if all of the displaced gasoline were refined from the oil with the highest GHG-per-MJ of petroleum product rating in the OCI (China Bozhong), it would point to a savings of 8.4 million metric tons of GHG savings per annum. There are assumptions and methodological approaches that can be debated in these calculations, but the key takeaway holds: displacing the dirtiest oils in the global economy is worth almost twice as much in terms of climate benefit as displacing the cleanest oils in the global economy. Even among the thirty oils initially analyzed by the OCI, the diversity of climate impacts among the oils available to modern industrial societies today is impressive:

Figure 4:

Source: Carnegie Endowment for International Peace

Conclusion: A Modest Proposal for Tomorrow

At a time when increasing regulatory burden is being placed on the vehicles using crude oil, surprisingly little scrutiny is paid to the oils themselves. Clearly, there is an opportunity for the United States and Germany to collaborate on a novel enhanced approach to decarbonizing the transport sector by focusing on lowering emissions across the entire petroleum value chain, not just at the point of combustion. 

This approach could derive from—and improve upon—Germany’s implementation of the nascent EU Fuel Quality Directive legislation, which requires a gradual reduction in the carbon intensity of the EU transport fuel mix, as well as California’s Low Carbon Fuel Standard that shares a similar aim. Both of these existing policies are well-intentioned but flawed, in many cases encumbered by the fact that other major economies have not chosen to pay attention to the growing diversity of climate impacts among the varieties of crude in existence today, from shale oil to oil sands to arctic oil and beyond. If major economies and oil users such as the United States and Germany were to work toward a common, science-based regulatory approach, they would reduce the overall economic cost of such regulation, lower the carbon footprint of oils while oil alternatives continue to mature, and more equally share the burden of decarbonization among stakeholders in the transport sector. 

On a longer timescale, such an approach could also lay the groundwork for yet more innovative approaches to climate policy such as labeling the origin, carbon intensity, and other parameters of transport fuels directly at the pump, so that the next generation of consumers are more empowered to exercise choice in the market, or using isotopes or other chemical markers to track crude oils and intermediate feedstocks as they move around the market.  

Some will find such ideas staid and unadventurous, while others will dismiss them as avant-garde and unachievable. That they can simultaneously exist as all of these things in the minds of serious people is not discouraging, but exciting. It points to the “uncharted waters” that the world of oil represents for climate policy, and suggests a truly significant opportunity for Germany and the United States to jointly seize. In doing so, Germany would renew and reaffirm its leadership on climate change, the United States would demonstrate to the world a new level of seriousness and creative thinking on climate issues, and the two—in partnership—would use the transatlantic relationship in a new and innovative way. 

When Nixon was asked why he took his historic trip to Communist China, at the height of the Cold War, he answered, “Taking the long view, we simply cannot afford to leave China forever outside the family of nations.” The same could be said for the role of oil in the family of energy resources when considering the long view on how the G7 climate challenge might one day be met.

Notes

¹  Helmut Weidner, Climate Change Policy in Germany: Capacities and Driving Forces, European Consortium for Political Research, Paper prepared for the workshop “The Politics of Climate Change", ECPR Joint Session of Workshops, Rennes, 11-16 April 2008.

²  Ibid.

³  UNFCCC, Report of the Conference of the Parties on its First Session, Held at Berlin from 28 March to 7 April 1995, FCCC/CP/1995/7/Add.1, 6 June 1995, http://unfccc.int/resource/docs/cop1/07a01.pdf 

⁴  European Council of Environment Ministers, Press Release PRES-96-188, European Commission Press Release Database, http://europa.eu/rapid/press-release_PRES-96-188_en.htm?locale=en 

⁵  Barbara Hendricks, “Der Kohleabscheid kommt,” Die Welt, 3 July 2015, http://www.welt.de/print/die_welt/debatte/article143478013/Der-Kohleabschied-kommt.html 

⁶  G7, Leaders’ Declaration G7 Summit 7-8 June 2015, Schloss Elmau G7 Summit, https://www.g7germany.de/Content/DE/_Anlagen/G8_G20/2015-06-08-g7-abschluss-eng.pdf?__blob=publicationFile

⁷ Power plant operators in Germany were compensated by the government, who paid for the cost difference between oil and coal, which had historically been a much more expensive feedstock. These payments continued until 1994, when the Constitutional Court ruled against them on the basis of the electricity price levy used to fund the payments.

⁸  Vaclav Smil, “The Real Price of Oil,” IEEE Spectrum (21 September 2015).

⁹ Toyota, 2014 Environment Report, http://www.toyota.com/usa/environmentreport2014/carbon.html

¹⁰  500 million gallons * 120MJ/gallon = 60 billion MJ of oil product energy. If 60 billion MJ is multiplied by the GHG-per-MJ rating of Norway Ekofisk (0.08kg of CO2 equivalent per MJ), it results in an estimated 4.8 billion kg of CO2 equivalent, which can be restated as 4.8 million metric tons of GHG. If 60 billion MJ is multiplied by the GHG-per-MJ rating of China Bozhong (0.14kg of CO2 equivalent per MJ), it results in an estimated 8.4 billion kg of CO2 equivalent, which can be restated as 8.4 million metric tons of GHG.

¹¹ For facility level emissions in the United States, see: http://ghgdata.epa.gov/ghgp/main.do. For a description of the most carbon-polluting plants in Germany, see: http://www.theguardian.com/environment/2014/jul/22/germany-uk-poland-top-dirty-30-list-eu-coal-fired-power-stations 

This piece was originally published by the American Institute for Contemporary German Studies.