Climate Change – Keynote Speech by Dr. Alfred Gossner, President of Munich Business School


Dear MBS students, dear faculty and staff, ladies and gentlemen,

I should like to welcome you to this year’s Semester Opening at Fraunhofer House. This is a particular pleasure for me as Fraunhofer House has for many years been my „Home Turf“. In a sense the building is also a special baby of mine as I inherited the building project from my predecessor and had the honour and the duty to complete the building into which Fraunhofer Headquarter moved in 2003.

Today is the 3rd time that I give this keynote address. As on the first two occasions I do not want to act only as a „friendly figurehead“, restricting myself to welcoming you warmly, saying nice words about the occasion, expressing thanks to all who deserve it and wishing you a good academic year. Of course all of these „niceties“ are worth saying. To save time I should like to ask you to accept that I have now expressed these issues politely and sufficiently.

As in the past two years I shall not report here on important current activities at MBS such as the process of obtaining the AACSB Accreditation or our efforts to improve our degree programs or our changes in the internal organization which hopefully will improve the quality of our products and services for the students – our customers.

Rather I will again use the freedom regarding the content of this speech to address a „big question“ which should be of interest for all of us:

How can we develop a rational and encompassing policy regarding the climate problem from the viewpoint of a country like Germany?

In the „tradition“ established in my two speeches before I choose deliberately a big question, which cannot be answered completely today. I will sketch out preliminary answers from different angles and hopefully initiate a dialogue with you beyond today and more intensive than in the last two years. Again this question and my preliminary answers will hopefully demonstrate to you how useful a scientific approach is for the solution of big practical problems and thereby motivate you to study seriously. As the great mathematician David Hilbert once remarked: Nothing is as practical as a good theory.

Setting the stage for my considerations

Let me manage your expectations and get a few things clear at the beginning.

The current public debate in Germany on the climate issue consists essentially of so called „proposals“ how to reduce CO2 (carbon dioxide) emissions. It is an amazing list which would take hours to present to you completely.

Some examples: Reduce the number of cows in the country as they produce methane which is much worse for the climate than carbon dioxide. Reduce or stop steel production. Prevent people from taking more than two intercontinental flights per year. Stop using brown coal for electricity generation within the next 10 years.

Don’t worry: I shall not add anything to such a list.

Most proposals of this nature are quite useless anyway. While they might reduce carbon dioxide emissions locally in Germany they would in most cases just export the problem outside Germany but not outside our world climate system.

Furthermore none of these proposals which refer to the use of an individual policy instrument is based on an analysis of costs and benefits, neither on a stand alone basis nor – as would be required – taking into account all climate-related instruments and their combined effects. We know from an economic viewpoint that carbon emissions should be reduced where this can be done in the most cost efficient way.

It is indeed worrying and for professional foreign observers often amusing that the German public and political debate wastes time with such isolated and often trivial ideas rather than addressing the real issues. We need to develop coherent scenarios of feasible climate and energy objectives each one supported by a system of policy instruments and measures  designed to actually reach those objectives  in an efficient  manner. Each scenario would obviously have different effects on various population groups and would therefore need to be complemented by a set of measures compensating specific population groups (at least partially) for negative impacts of that scenario. On such a basis the population and/or its representatives could choose the policy most widely supported in society.

I should like to stress that my criticism of the German public debate does not include “Greta” and her “team”. Greta argues on the level of our personal values and attitudes and asks us to change them in favour of an ecological sustainable development of the planet. If she is successful more people would accept a “strong climate protection” policy than otherwise. She is clever enough to leave the “technical” discussions about technologies and efficient policies to the experts.

I shall argue that we need much more scientific efforts in climate politics in order to reach such an optimal policy program. While the causes of the climate problem are quite well researched and to some extent also the likely cost of doing nothing about it, there is a need for much more scientific efforts to develop new technologies for „carbon free solutions“ and to design optimal respectively efficient climate policies. Especially the latter falls into our domain of economic analysis and the design of solutions.

The physical problem: Greenhouse gas and average temperature

The concentration of Greenhouse gases in the atmosphere goes up as more greenhouse gases are emitted during a period (of say one year) than absorbed from the atmosphere. A higher Greenhouse gas concentration changes the balance of heat radiation form the sun to the earth and from the earth into space. As less heat leaves the earth the average temperature rises. This process is not linear and there are feedback loops both accelerating and decelarating those processes. The Intergovernmental Panel on Climate Change (IPCC) which is a UN body has for decades now tried to model these interacting processes in complex scenarios and has published reports which underly most of the public debates.

Within the scientific community there have been many critical discussions whether those models reflect all the relevant factors and interactions. The assumption of longterm constant radiation from the sun may be a problem as cycles of changing sun activity have been observed (Die kalte Sonne…). Despite some relevant objections I feel that in the current situation we should take the IPCC warnings as very relevant. The risks of neglecting those warnings are too big for mankind.

The IPCC concludes from its analyses that we should keep the greenhouse gas concentration in the atmosphere at a level compatible with a maximum temperature increase of 2° Celsius (compared to preindustrial levels). To achieve that they propose to reduce “carbon emission” essentially to zero (except for some natural absorption such as growing trees).

This approach leads to  the idea of a greenhouse gas „budget“, i.e. a maximum global amount of greenhouse gas emissions which could still happen during the next few decades without average temperature rising by more than 2° Celsius during that time. This budget serves as a buffer for the necessary adjustments of economies and societies. Once it is used up net greenhouse gas emissions should be reduced to zero.

This budget concept explains the apparent paradox why we have been told now for a number of years that it is “5 before 12” and we need to implement big policy – and ultimately life style – changes immediately if we want to achieve the 2° goal. Greenhouse gas emissions have been rising globally rather than falling in recent years. However as long as the maximum carbon budget has not yet been exhausted there is a rather theoretical possibility that we we can stay within its limits if we reduce emissions dramatically within shorter periods.

A zero emission objective is not the only conclusion which can be drawn from the IPCC analysis. If we could use CCS (carbon capture and storage) or CCU (carbon capture and utilization) we could well have positive emission as long as CCS or CCU can offset it. While there are many open questions today regarding the practical implementation of CCS and CCU it might become relevant, if we cannot achieve zero emission on a global scale.

Beyond controlling carbon emissions there are some ideas of Geo Engineering aiming at limiting the amount of sun radiation reaching the planet. If these became relevant for practical use we could obviously have higher greenhouse gas concentration without higher average temperature. As they appear very unlikely today I will not consider those options in this talk.

Global and local consequences and costs of climate change: the case for a “mitigation strategy”

The physical and finally economical consequences of rising average temperature have been analyzed in great detail. Rising sea levels (melting glaciers and ice shields in the Arctic and on Greenland) are threatening coastal regions, more frequent and stronger storm events are damaging buildings and infrastructure, longer periods of more heat but also of stronger rain are leading to extended flooding and are damaging agriculture. These are key risks of climate change.

An early and very substantial study is the Stern Review on the Economics of Climate Change. This is a 700-page report released for the Government of the United Kingdom on 30 October 2006 by Professor Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE).

The Review states that climate change is the greatest and widest-ranging market failure ever seen. Market failure means that the emission of Greehouse gases and its negative economic consequences happen outside the market mechanism. Those who pollute do not pay for pollution and those negatively affected do not (yet) get compensated. This market failure is global because emissions anywhere contribute to rising global temperature and therefore contribute to damages everywhere.

According to the Review, without action 5–6 degrees of temperature increase in the second half of 21st century is “a real possibility”. The overall costs of such a climate change will be equivalent to losing at least 5% of global gross domestic product (GDP) each year, now and forever. Including a wider range of risks and impacts could increase this to 20% of GDP or more, also indefinitely.

Beyond the aggregate “World Perspective” the report looks at different regions in the world and the different impacts of climate change on those. Overall densely populated coastal regions and the southern hemisphere would suffer more than other areas.

The Review provides also various prescriptions limiting climate change in order to minimise the economic and social disruptions. Originally the review proposed that one percent of global GDP
per annum is required to be invested to achieve the 2° goal and avoid the worst effects of climate change. Later on this was increased to 2 %.

The Stern Review’s main conclusion therefore is that the benefits of strong, early action on climate change far outweigh the costs of not acting.

Such analyses and results form the basis of  the so-called „Mitigation Strategy“ which aims at decarbonizing the world production and consumption completely in the near future to stabilize greenhouse gas concentration forever  between 500 and 550 ppm  and thereby hopefully global average temperature.

Mitigation is at the core of the EU-Strategy and many country strategies including also the German climate objectives.

The alternative or complementary strategy of „Adaptation“, i.e. dealing with negative consequences of climate change as they arise rather than trying to avoid it has received much less attention although we will have to use it if mitigation fails.

Mitigation would be an obvious choice in a world run by a world government. If the global cost of avoiding climate change is (much) lower than the cost of climate change a world government would know what to do. Unfortunately we have a global problem caused by the global „Externality“ of greenhouse gas emissions in a world run by about 200 country governments with extremely differing problems and resources.

The governments of some South Sea Island States might loose their territory completely if sea levels rise a few meters. They want mitigation now, financed by the rest of the world. The governments of many less developed countries go for material improvement of living standards of their population as top priority. Higher income per head usually implies higher energy consumption per head. As long as renewable energies are more expensive than fossil fuels (taking into account total costs of energy systems) they go for the latter. This is why China and many African states build so many new coal power stations. It is mainly relatively rich industrialized societies who care strongly for climate and environment and who can afford rapid changes of energy structures in industry, mobility and housing.

Finally the owners of large fossil reserves are not interested in writing these off rather than extracting and selling them to the rest of the world. Professor Sinn called this the green paradox. We may be able in rich countries to reduce or even avoid the use of oil and gas (fossil fuels) by making them very expensive while offering affordable alternatives such as electric cars and heating systems. This is demand management. However we cannot globally reduce supply of fossil fuels. As long as world market prices are above extraction costs there will be supply of fossil fuels in the interest of the owners. Producers in middle east countries can provide a barrel of oil at cost of less than 10 USD. Thus there will be global supply at prices way below todays level. It will be very difficult respectively costly to persuade developing countries to not use such cheap offers.

The debate about mitigation in a fragmented world society

We have seen that countries are in very different situations regarding climate change, its impact and their resources to deal with it. The debate about who should take specific measures about climate change which is as much a debate about  distribution of resources as about  efficient allocation erupted at the UN Copenhagen Climate Change Conference in 2009.

The conference showed clearly large differences between the countries and ended without agreement.  The developing countries agreed – not surprisingly – that the rich western industrialized countries should pay for climate change as the rise in greenhouse gas concentration compared to pre-industrial levels was largely due to their industrial development. Thus it became obvious that in a politically and economically fragmented world a unified position towards global mitigation was very difficult to achieve.

Since then the debate has softened and we have seen some convergence towards a consistent global position. The Paris Agreement reached in 2015 at the UN Climate Change Conference in Paris underlined the global 2° objective (or even 1,5 °). However it was mainly a change in atmosphere and not yet in substance.

Paris did not lead to binding agreements on country climate policies which jointly would support such ambitious goals. The climate strategies presented so far by participating countries do not “add up” to 2° or even less. Some studies have found that those strategies – if implemented completely – would rather lead to a temperature increase of 2,7 to 3,5 °. On top of that we know, that a number of countries are even behind the targets set by themselves. This is also true for Germany.

Probably the biggest problem for the Paris agreement is the lack of support by the largest greenhouse gas emitters China and USA. The USA have unter president Trump withdrawn from the Paris agreement. Chinese climate objectives so far are not ambitious enough.

To give you some feeling for the quantities involved I quote the numbers:

  • China leads CO2 emissions of all countries with 28 % of world output; in absolute numbers: 9 bn metric tons or 6,6 metric tons per capita and year.
  • USA follows with 15 %; in absolute numbers: 5 bn metric tons or 15,5 tons per capita and year
  • Germany contributes about 2 % to annual world emission;  in absolute numbers: 0,73 bn metric tons or 8,9 tons per capita and year

We must realize that the differences between the countries are not likely to go away fast. It is not stubbornness of the countries but the relatively high costs of changing existing energy systems to carbon free systems across all sectors. This will be pointed out in more detail in the next section. Only major technological breakthroughs will change the situation.

In view of this relying only on the mitigation strategy could be short sighted and costly. Germany’s greenhouse gas emissions are not very relevant for climate change but will be very expensive to avoid.

Economic and technical problems of the mitigation strategy

Today after many years of following officially the mitigation strategy, i.e. aiming for carbon neutrality by 2050, it is not clear how a carbon free economy and its energy system will look like and what will be the cost for Germany.

Major technologies needed for a carbon free economy are not yet well enough developed let alone implemented.

In Germany we have implemented a large photovoltaic and wind energy capacity for power generation. Its annual costs exceed 20 bn € which are paid by private households and enterprises via very high electricity prices. On sunny and windy days this „renewable energy system“ can produce almost all electricity consumed during the day. On days with little sun and wind (Dunkelflaute) it contributes very little and has to rely on our „old energy system“ i.e. numerous coal, oil and gas energy plants in addition to our remaining nuclear capacity which will be terminated by 2022. It is obvious that running effectively two systems parallel drives cost up. It is not clear what can and should replace the “old system” once it is “switched off” (nuclear, brown coal) or technically written off.

Obviously a renewable energy system relying largely on sun and wind needs a solution for natural volatility of sunshine and wind. One answer could be large storage systems bridging not only day and night differences but also seasonal differences. Such systems are so far not even conceptually clearly defined let alone implemented. While specific costs per kwh would go down with volume they are too high now.  One of the most efficient storage technologies are water pump storage dams. However in Germany we do not have many suitable sites and on top usually strong local resistance. Norway with its abundant water power capacity could serve as a “battery” for some of the needs of other European countries but by far not for all.

In the early days of the “Energiewende” there were hopes that volatility in one country could be compensated by renewable energy supply of other countries provided there was enough net capacity within Europe. Meanwhile we know that weather in European countries is highly correlated: sunny and windy days – but also days without one or both – occur largely parallel in most European countries.

All this leads to the conclusion that as long as we have no large scale storage solution we need to continue relying on a „second power generation system“ to make up for sun and wind deficits. As it looks power generation from fossil gas is a likely solution if we find a way to make it attractive for investors to invest in such “reserve capacity”. Obviously such double systems are expensive. On top they will require additional net capacity. All this has to be added into the overall costs of our new low carbon system. The alternative of importing coal based electricity form other countries would make the economy vulnerable und would not help world climate.

The mobility sector too is far from carbon neutrality. It comprises private cars, lorries and trains which are still largely based on fossil fuels. While there is now a supply of pure battery cars and of hybrids relatively few are on the road. Despite subsidies for purchasing such cars they are relatively expensive. On top of that there is limited mileage compared to combustion engines, the relatively long time for battery loading and the lack of loading stations. There will be progress as more efficient cars and batteries are developed and we invest heavily into the loading infrastructure. However true “green mobility” requires also “green production”  and „green electricity“  to become really climate neutral.

“Combustion cars” have in recent years become larger (SUV) and their engines more powerful which has compensated for progress in fuel efficiency.

Finally the housing sector by its nature takes a long time to switch to carbon free heating systems.

Thus we should not be surprised that Germany’s overall greenhouse gas emissions have not really dropped so far.

The cost of a “carbon free life” as estimated in the Stern report with 1-2 % of GDP does no longer look realistic.

New Zealand is one of  the few countries who have researched this question thoroughly. They estimate that the cost of reaching climate neutrality will rise up to 2050 to 16 % of their GDP assuming economic efficiency all along the way. 16% is equivalent to todays government budget in New Zealand.

The situation in most other industrialized countries is probably similar. While governments stress the objective of climate neutrality their countries are far from reaching it and the cost of the transition to and the future use of a climate neutral economy is rising.

16 % of GDP is a serious number. Its magnitude explains the reluctance of many developing countries to subscribe to carbon neutrality by 2050. A mitigation strategy would obviously need substantial redistributive policies on top of todays welfare states in order to find acceptance with populations. Politicians know how difficult it is to find consensus on such measures.

Conclusion

We need to recognize in our planning the true global nature oft he climate problem. Mitigation will only work if it is in the interest of most large greenhouse gas emitters. This is currently not the case. Western industrialized countries could improve willingness of large emitters by paying for the cost of mitigation. Given the volume of such cost this is not very likely to happen.

Therefore we need a dual strategy of partial mitigation and keep resources available for adaptation strategies. The best mix has to be decided during the next 3 decades as we see more clearly who does what.

We need also to widen our decision space and integrate climate and energy policies with development policies. Poor countries show strongest population growth (Africas population will double by 2050) and tend to use cheapest energy sources regardless of the climate impact. With rising income per capita population growth reduces and there will be more space for climate oriented energy sources.

On top of these global aspects we need to better plan our national efforts in Germany for mitigation. We need far reaching technical innovations to reduce carbon emission in the key sectors of electric power generation, industry, mobility and housing. Government should invest much more into applied research in these areas.

Regarding the implementation of policies to reduce carbon emission we need an efficient mix of instruments whose likely effects in combination of all instruments have been carefully evaluated. Given the complexity of such a policy mix the emphasis should be on measures directly aimed at carbon reduction. The best instrument for that is a system of tradable emission certificates, which applies to all energy-using sectors. Thus the total amount of greenhouse gas emissions can be controlled and gradually reduced while the market mechanism makes sure that emissions are reduced where this is economically most efficient. Obiously such an allocative mechanism will have different effects on various population groups. It needs therefore to be accompanied by policies designed to smoothen the distributional effects of emission control.

I do hope that my thoughts have convinced you how important your academic education is for our future. I invite you once again to a dialogue with me on these issues and I look forward to your critical contributions.

Have a great academic year.

Dr. Alfred Gossner
About Dr. Alfred Gossner 3 Articles
Dr. Alfred Gossner is the President of Munich Business School. He has been a Member of the Board of Directors of Fraunhofer-Gesellschaft e.V. since 2002, and has worked in the international management for almost 20 years, 16 of which he spent with insurance company Allianz.Dr. Gossner studied economic sciences, econometrics and politics at Ludwig-Maximilians-University of Munich (LMU) and at University of Lancaster. He also has a degree in philosophy from Munich School of Philosophy. After post-graduate studies at University of Oxford as a Rhodes Scholar, he earned a doctorate in economics at LMU. In 2010, he was appointed Professor Extraordinary at the Business School of renowned Stellenbosch University in South Africa.Dr. Gossner also holds several mandates in supervisory boards and councils, is a Member of the Executive Committee of the Global Research Alliance, and is on the Board of Trustees of the “Sponsors and Friends of the Bavarian State Library”.