Donnerstag, April 07, 2011

A Shrug: Return of the Railroad...

Odd title at first, but bear with me.

Starting in 2013, new energy laws come into effect in Germany, requiring companies within an industry to meet "best-of-class" energy targets or be required to buy emission permits to offset the fact that they do not meet best-of-class energy usage.

The problem?

It will drive key industries, those making energy-intensive products, into a corner where they can either close down, move production outside of the Euro-Zone, become uncompetitive or go out of business because profits won't finance the cash flow needed to invest.

The problem? Defining best-of-class energy usage for the industry as a whole.

Simply put, the EU is set to introduce benchmarks that certain key industries cannot meet. Not "can't afford to" or "is unwilling to" or "doesn't want to", but rather can't. The currently planned benchmark means that no open-furnace steel maker anywhere will be able to meet the benchmark as it is not technically possible to do so.

Either the companies can close their operations down and leave the business, or they can move production outside of the Euro-Zone and ignore the energy targets entirely, or they can pass the emissions permit costs on to their customers (driving their prices up and becoming, given the fact that competitors don't have to do this) and become uncompetitive (and hence leaving the business at some point via bankruptcy), or they can eat the costs, which will, however, be so high that they will no longer be able to finance investments out of their cash flow. The amount of money involved is not trivial (and comes out of profits): it will be hundreds of millions of Euro for Germany alone.

This isn't just the case for steel: it is also the case where electricity is one of the raw materials used in manufacturing, not merely used to light things and run computers. The largest PVC production plant, for instance, uses 800 GW-Hours in a year, about as much as fair-sized city: it is not technically possible to make it any other way.

We're not talking old, inefficient plants, either: these are the most modern around. The increases in prices due to the emission permits means an additional tax, as it is that, of around €15k per worker in 2013.

And possibly more.

The problem here is that politicians are making decisions that industry has to live with, but without understanding that at least some of the decisions are simply not technically possible. Not that they aren't feasible, or cost too much, or take too long to implement, but rather that there is simply no way to bend the laws of physics and chemistry to meet those goals.

So why the title?

Consider this: the industries involved (concrete, chemicals,, glass, metals and paper) are core primary industries. They feed into all other industries. Without their production, nothing else can be made.

What we have here is tragedy masquerading as policy. In the name of the greater good, functioning, efficient and profitable industries will be destroyed based upon the whim of politicians who should know better.

It is what happened in Ayn Rand's novel, Atlas Shrugged. If you have read that, you know how it ends. Substitute primary industries for the railroads, and you end up with the same story line.

If you haven't read it: worth the read. It's not the best economics, nor is much the story entirely plausible (railroads aren't that critical given the highway system and air transport), but it does contain a message worth understanding: beware the takers, beware those who are willing to destroy for the greater good.

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