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Energy Policy 35 (2007) 3807–3814

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Hard coal subsidies: A never-ending story?

Manuel Frondel�, Rainer Kambeck, Christoph M. Schmidt

(Rheinisch-Westfalisches Institut fur Wirtschaftsforschung RWI Essen) Hohenzollernstr. 1-3, 45128 Essen, Germany

Received 13 November 2006; accepted 16 January 2007

Available online 13 March 2007

Abstract

In Germany, hard coal has been subsidized for almost half a century. Despite the declining significance of hard coal production for the

domestic labor market, the subsidies have continued to increase until the middle of the last decade, reaching a peak at h6.7 billion in

1996. While these subsidies have been continually shrinking since then, settling at h2.7 billion in 2005, it is very likely that hard coal

support will be extended in Germany well into the next decade and even beyond. This article questions the main arguments raised by the

proponents of hard coal subsidization in Germany and other EU countries. Most importantly, in addition to the drain these subsidies

impose on public budgets, substantial opportunity costs are implied, leading funds away from alternative, more beneficial public

investments. From a social welfare perspective, we, therefore, recommend the rapid abolition of these subsidies not only in Germany,

where in real terms the accumulated amount of subsidies has now far exceeded h165 billion, but also all across Europe.

r 2007 Elsevier Ltd. All rights reserved.

Keywords: Energy policy; Energy security; Coal mining

1Anderson (1995, p. 492) also summarizes the empirical evidence

originating from econometric studies: an industry is likely to receive more

assistance, the more the industry is low-wage, low-value-added, and

declining, with only a few firms being involved facing strong and growing

import competition. Political support can typically be recruited even more

1. Introduction

Since the coal crisis of 1958, Germany has beensubsidizing the hard coal mining sector, spending someh158 billion—in prices of the year 2000—between 1958 and2002 (Storchmann, 2005, p. 1491). Even today, hard coalsupport is still the largest single subsidy paid by theGerman federal government (BMF, 2006). The EuropeanCommision (2006a) authorized Germany to grant h2.7billion in hard coal subsidies in 2005, cementing Germany’srole as the largest supporter of hard coal productionamong all OECD countries (Storchmann, 2005, p. 1469).

Although hard coal subsidization has been criticized fordecades by virtually all respectable German economists(e.g., SVR, 1983), the subsidies paid in 2005 were at aboutthe same level as in the first half of the 1980s (see Fig. 1),when hard coal production was substantially higher. Thispattern reflects the widening gap between the domesticproduction cost and the world market price of steam coal(see Fig. 2). The subsidies rose particularly dramaticallybetween 1986 and 1996. Only after 1996, when they peaked

e front matter r 2007 Elsevier Ltd. All rights reserved.

pol.2007.01.019

ing author.

ess: frondel@rwi-essen.de (M. Frondel).

at h6.7 billion, did German hard coal subsidies begin toshrink.The persistency of hard coal subsidization in European

countries such as Spain, Poland, and particularly Germanyperfectly matches standard political economy considera-tions (Anderson, 1995, p. 492).1 This approach toexplaining political decisions argues that it is in the interestof governments to deliver large benefits to well-organizedgroups, while costs are typically dispersed among lessorganized groups such as taxpayers.Since the publication of a special issue of Energy Policy

on the implications of dismantling hard coal subsidies(Radetzki, 1995a), there have been only a few internationalstudies such as Storchmann (2005) that have addressed thetopic, despite the fact that Anderson’s (1995, p. 495) mildhope—that Belgium’s dismantling of subsidies in the early

successfully if the industry is geographically concentrated, e.g., is a major

employer in a region and involves only a small number of towns.

Anderson concludes that it is thus not surprising that Western Europe’s

coal mining industry has enjoyed increasing assistance.

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6 6

1 1

2 2

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0 0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Total

Sales aids

Other

Fig. 1. Subsidies in billions of h for the German hard coal mining industry. Sources: Storchmann, 2005; BMF, several years.

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domestic industrial coal

steam coal imports

0

Fig. 2. Widening gap between prices (in h per ton of coal equivalents) for German and imported steam coal. Source: VdKI (2005, p. 78).

2Belgium and France merely produced small amounts from recovered

slurries, while the annual production of Norway, Turkey, and Italy is

typically between 0.1 and 3Mt (IEA, 2006, p. I.5).

M. Frondel et al. / Energy Policy 35 (2007) 3807–38143808

1990s would spread to the remaining protectionist coun-tries—has not come true. Meanwhile, the situation on thedemand side has changed significantly, particularly in theEuropean power generation sectors, and the time has cometo re-examine the prolongation of hard coal subsidization.Its proponents relentlessly advocate it, referring to energysupply security and employment effects as their majorarguments.

Against this backdrop, the current article discusses thepros and cons of hard coal subsidization, mainly concen-trating on the example of Germany. From a social welfareperspective, none of the arguments raised in favor offurther subsidization is convincing. In line with theInternational Energy Agency (IEA, 2002, p. 72), wetherefore recommend the rapid abolition of hard coalsubsidies in Germany, where it currently seems likely thatsubsidies will be extended well into the next decade andeven beyond.

Our analysis commences with a description of the hardcoal market in OECD Europe and its competitiveness withthe international hard coal market (Section 2). Section 3 isdevoted to the frequently employed argument of energysupply security. In Sections 4 and 5, we balance theeconomic and environmental costs and benefits of subsidiesfor domestic hard coal production. Section 6 examines thesocial consequences of discontinuing coal production. InSection 7, we draw our conclusions.

2. Hard coal production in Europe

In 2005, hard coal was produced in 10 European OECDcountries, with 5 countries being of minor importance.2

With almost 26Mt in 2005, Germany was the secondlargest producing country, topped only by Poland, whoseproduction amounted to about 100Mt (IEA, 2006, p. I.5).While some of these OECD countries, most notablyGermany, spend substantial amounts of money on hardcoal subsidization, other countries, above all the UnitedKingdom and the Czech Republic, operate withoutsignificant government support (IEA, 2006, p. I.5). Thereason is that, unlike the situation in Germany, productioncosts are close to the world market price, particularly in theUK (IEA, 2003, p. I.208). In fact, the UK records by farthe lowest and declining cost levels over time (Radetzki,1995b, p. 517).The importance of hard coal has steadily declined in

Europe over the past decades. In Germany, for instance,demand for hard coal fell from about 106Mt in 1973(IEA, 2003, p. I.107) to just below 68Mt in 2004 (IEA,2006, p. II.166). Almost exclusively, this decrease indemand was driven by the decline in coking coal (IEA,

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2006, p. II.166), a high-quality coal grade needed forproducing the coke that is essential for steel production. Inthe UK, the decline in hard coal consumption was evenmore pronounced than in Germany. In 2004, the UK’sconsumption of hard coal was only about half of the120Mt used in 1978, primarily caused by the decline insteam coal consumption of electricity producers (IEA,2006, p. II.232). In OECD Europe as a whole, hard coalconsumption shrank some 25% from roughly 506Mt in1978 to about 382Mt in 2004 (IEA, 2006, p. II.59).

Even stronger than the decrease in consumption was thedecline in production: Between 1978 and 2004, total hardcoal production in OECD Europe fell by around 60%,from 483 to about 187Mt (IEA, 2006, p. II.56). As a result,the import share of these OECD countries has increasedfrom 5% to 51%. The most important reason for this muchstronger dependence on imports is the lacking competi-tiveness of European hard coal production. In Germany,for example, the cost of domestic coal production has beenmore than three times the import price of steam coal fordecades (see Fig. 2 and Radetzki, 1995b, p. 517). This costdiscrepancy is due to the fact that virtually all the coalproduced in countries such as Colombia, Indonesia, andVenezuela comes from large-scale low-cost open-castmining operations rather than pit mines, as is the case inEurope. Open-cast mines also account for some 80% ofAustralian coal and about 60% of the coal produced in theUSA. This is why these countries are able to reach aproductivity of up to 16,000 tonnes per employee per year(Schiffer and Kopal, 2005, p. 173). In Europe, wheremining conditions are generally much more difficult,productivity only reaches about 5% of this figure. Theconsiderably lower cost makes overseas coal much moreattractive to customers than coal from Europe, andespecially from Germany.

3. Energy policy: security of supply

Security of supply is among the most cited argumentsraised against the abolition of hard coal subsidies in EUcountries such as Spain and Germany (IEA, 2002, p. 70).Since the liberalization of power markets in 1998, however,the situation in the European power generation sectors—

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01980 1982 1984 1986 1988 1990 1992

World Seaborne Cokin

World Seaborne Ste

Fig. 3. Wold hard coal trade in Mt. Source

responsible for as much as 81% of hard coal use in OECDEurope in 2004 (IEA, 2006, p. II.59)—has significantlychanged. Ascertaining secure energy and raw materialsupplies has now become the responsibility of private

industry, rather than that of governments. Thus, privatepower generators have an interest in using long-termcontracts and other measures to avoid any supplyscarcities; otherwise, their profit would shrink.The situation in power generation is now similar to that

in other industry sectors, such as copper and aluminumproduction, where it is the sole responsibility of the firms tosecure their production inputs. Meanwhile, it has alsobecome normal practice for power generators to bear theprice and quantity risks pertaining to the procurement oftheir major inputs, such as natural gas and coal. Germanpower generators, for instance, increasingly purchaseimported hard coal from a variety of countries, mainlyfrom the non-OECD countries Colombia, South Africa,and Russia, as well as from OECD countries such asAustralia, Poland, and the US (IEA, 2006, p. II.168).Short-term bottlenecks can be—and usually are—

accommodated by the private stockpiling of importedcoal. In this way, security of supply can clearly be ensuredmuch more efficiently than through subsidies for domes-tically produced coal: stockpiling costs are estimated ataround h5–8 per ton (Junkernheinrich, 1987, p. 416), whichis far less than the difference between domestic productioncost and import coal prices. Over the long term, there hasbeen a significant improvement in the supply situation, asglobal trade in hard coal has been growing substantially inrecent decades (see Fig. 3). The seaborne trade has doubledsince 1990; and has increased almost sixfold since 1975.The total amount of globally traded hard coal, includingcoal carried by land, has quadrupled between 1975 and2005 (Schiffer and Kopal, 2005, p. 172; VdKI, 2006, p. 2).Over the past 15 years, traditional exporters such asAustralia, Canada, Poland, and the US have been joinedby many other countries, most notably China, Russia,Colombia, Indonesia, and Venezuela (Schiffer and Kopal,2005, p. 173).The increase in hard coal trading even accelerated

between 2003 and 2005: world trading surged by about20% to 804Mt (VdKI, 2006, p. 2). That is, within only two

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01994 1996 1998 2000 2002 2004

g Coal Trade

Total World Coal Trade

am Coal Trade

s: IEA (2003, 2006) and VdKI (2006).

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Crude Oil

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Natural Gas

Fig. 4. Comparison of oil, gas, and steam coal prices in US-$ per ton of coal equivalents. Source: IEA (2005, 2006).

M. Frondel et al. / Energy Policy 35 (2007) 3807–38143810

years, world market growth could have easily replacedPoland’s current hard coal production of roughly 100Mt.Compared with these volumes, the quantities of coalproduced in Germany and Spain were virtually insignif-icant. At around 26Mt in 2005, German hard coalproduction only corresponded to about 3% of the globaltrade volume; Spain’s production of about 8Mt was evenless significant (IEA, 2006, p. I.34). Given the strongcapacity expansion in several countries, particularly inIndonesia and Russia, world production capacity and,hence, global trade can well be expected to growconsiderably in the future (Kopal, 2006, p. 72).

Some observers are currently raising particular concernsabout the shrinking exports of China, the world’s largesthard coal producer, whose production share was greaterthan 40% in 2004 (IEA, 2006, p. I.4). Between 2003 and2005, China’s steam coal exports sank by 18%, from about80 to approximately 66Mt (IEA, 2006, p. III.19). Chinesecoking coal exports were even more reduced, from slightlymore than 15–6Mt (IEA, 2006, p. III.18), a decrease of61%. Yet, as Fig. 3 demonstrates, higher levels of exportsby Australia, Colombia, Russia, Indonesia, and the UShave been more than sufficient to offset the shortfall inChinese exports in recent years (VdKI, 2006, p. 55). Afterall, China’s reduced exports had hardly any impact onEurope’s import volumes,3 although it did on worldmarket and import prices. Yet, the volatility of importprices for steam coal is significantly less pronounced thanfor other fuels such as oil or natural gas (IEA, 2006, p. I.18;Fig. 4).

In sum, while raw material markets are well known forcyclical fluctuations (Kopal, 2006, p. 72), electricitygenerators, as well as steel producers, can avoid short-term bottlenecks by stockpiling imported coal, which is amuch more efficient way of achieving supply security thanby subsidizing the domestic production of hard coal, whilea growing world market offers reasonable long-term supply

3OECD countries in Europe have not been affected by this dramatic

drop, as they usually do not import Chinese coking coal (IEA, 2006, p.

III.18). Similarly, steam coal imports from China have always been heavily

fluctuating around low levels of several hundred thousand tonnes in

Germany, France, Spain, and the UK, once again reaching only very low

levels in 2005 (IEA, 2006, p. III.19).

security (IEA, 2002, p. 70). The International EnergyAgency, therefore, concludes that ensuring energy supplysecurity is not a strong basis for continuing German hardcoal production, since the risk of a persistent interruptionof supplies can be regarded as minimal (IEA, 2002, p. 71).

4. Economic effects of subsidized hard coal mining

Any analysis of the economic effects of hard coalsubsidies must recognize that there is no genuine demandfor German hard coal. Domestic power generators as wellas steel producers can purchase hard coal on the fast-growing world market, while today private consumershardly use any coal for heating. Therefore, any decision toreduce or even discontinue domestic production would havevirtually no effect on the activities of German power and steelcompanies and their demand for labor. Subsidies for the coalindustry simply degenerate to a program of job provision bythe public sector, bearing all the negative consequences of thistype of active labor market policy (Schmidt et al., 2001;Jacobi and Kluve, 2006; Kluve, 2006).For a comprehensive assessment of subsidies, one has to

take account of a range of cost categories (see, e.g.,Junkernheinrich, 1987), with opportunity costs of alter-native investments of public funds being an important, yetfrequently ignored issue. A thorough assessment must alsoaddress financing aspects, which is all the more important,since subsidies often contribute significantly to the publicdebt. Germany seems to be an outstanding example, wherean accelerated reduction of hard coal subsidies would helpto mitigate current severe public deficits. The federal publicdebt has increased by roughly two-thirds since 1990,reaching the level of about h888 billion in 2005 (BMF,2006; BWpV, 2006).In this context, a superficially plausible argument is that

the increased income and consumption tax revenues,evoked by the subsidies’ impetus, lower the government’snet support.4 However, a comprehensive account of publicresource flows would also include a variety of services

4This kind of argument is also employed in favor of the support of other

commodities such as biofuels, for instance, which are not competitive to

conventional fuels and thus are supported in many EU countries by

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provided by the government to the mining industry, such asthe maintenance of infrastructure, to the extent that theybenefit the subsidized sector (Junkernheinrich, 1987,p. 413). Excluding these services while including the taxrevenues would be distorting the record. If theseservices were contrasted with the additional taxrevenues, though, the result would likely tilt against theGerman coal mining industry, as these subsidies weregranted to compensate for its poor economic perfor-mance.

Another general justification of public subsidies is thatso-called Leontief multiplier effects are induced (Raa,2005): In addition to the immediate impact on thesubsidized sector, so the argument goes, there is an indirectimpetus in sectors with close economic ties to thesubsidized industry. Based on the interconnections betweendifferent industrial sectors, which are typically captured byinput–output analyses, such Leontief multiplier effectsreflect the fact that upstream sectors usually providesignificant input to the added value generated by thesubsidized sector, whose output, on the other side, triggersadded value in downstream sectors.

While these indirect effects are frequently said tosubstantially exceed the direct effects induced by hard coalproduction in Germany, Storchmann (1997, p. 313)criticizes the static character and the inability to accountfor price-induced substitution as major pitfalls of theinput–output analyses underlying the estimation of themultiplier effects. However, (gross) multiplier effects areeven created in the classical example of wasting publicfunds in which a perfectly intact road is torn up in order torebuild and pave it again. This type of project would alsocall for inputs of upstream sectors and employ workerswho use their wages to buy food and other goods andservices, but it is obvious that there cannot be any genuineadded value.

Furthermore, given that the large-scale reduction ofgovernment interventions is not a viable political option,the most important aspect in the discussion of the hard coalsubsidies’ net effects is the crowding-out of possiblealternatives. In other words, one needs to raise the questionof opportunity costs and ask what alternative multipliereffects are not realized when allocating the public funds tothe hard coal industry as opposed to some other use,potentially creating substantial value added there andtherefore improving social welfare. Investments in trans-portation infrastructure, education, as well as research anddevelopment regarding future energy technologies cancertainly be expected to yield much higher benefits thanhard coal subsidies.

This crowding-out of alternative investments is oftenignored when the economic impact of subsidies isevaluated. Clearly, it is always easier to defend the status

(footnote continued)

reductions and exemptions from mineral oil taxes (Frondel and Peters,

2006).

quo than to make a case for a counterfactual situation5

with lower or no subsidized hard coal production. Yet, ifthe counterfactual alternatives command higher multipliereffects, the net effect of the hard coal subsidy is negative,and continued support for coal subsidies significantlyweakens the chances for supporting promising, future-oriented projects, as governments commonly do not haveunlimited funds at their disposal. Determining the respec-tive opportunity cost may be an ambitious endeavor,specifically if there is a large range of potential investmentalternatives. A convenient approximation of these oppor-tunity costs might be based on an average interest rate thatis employed for estimating the capital cost of theaccumulated subsidies (see e.g., Junkernheinrich, 1987,p. 415). Yet, while an appropriate interest rate may bereadily found, it appears to be difficult to stipulate any timeperiod for such an investment calculation.We thus argue in more general terms that only those

alternative investments deserve any public support thatunleash the creative and economic potential of a country,thereby substantially enhancing future economic perfor-mance and employment prospects and, hence, creatinggenuine added value. Investments and subsidies that arenot found to meet this objective, however, should beabolished as soon as possible. For this reason, as a generalprinciple, subsidies are to be granted only for a limited time.In the case of the German hard coal industry, however, thereare no prospects whatsoever that it could become profitablewithin a foreseeable period of time. These subsidies merelyensure the continued existence of this industry, therebyreinforcing obsolete structures. In addition, the structuralchange in upstream sectors is impeded as well by reducing theincentives to develop to the point where survival is possibleunder market conditions.Finally, an often repeated argument is that subsidies and

the continuation of German mining operations areessential in order to ensure export prospects for leading-edge mining technology from Germany. The questions weought to be asking, though, are: first, why such asuccessful, but highly specialized, activity is not subsidizeddirectly and only for a limited period of time and, second,why companies cannot find opportunities to test theirtechnology in the mines of potential customers located inother countries. Furthermore, it seems to be very unlikelythat all these companies and employees would fall idle ifsubsidies for the German coal industry were discontinued.In sum, while public funds can be spent more or less

wisely, chances are high that net social welfare will improveif they are spent in a way that enhances the futureeconomic potential. However, in the case of a large-scalejob provision program that supports the continuedproduction of a good such as domestic hard coal, forwhich no genuine demand exists, any hope for positive net

5For an extensive discussion of the fundamental evaluation problem, the

importance of constructing counterfactuals, and potential evaluation

approaches in environmental contexts, see Frondel and Schmidt (2005).

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effects seems highly unlikely. In the next section, we arguethat the continuation of the hard coal subsidy policy resultsin significant environmental damages. Thus, even thesubsidies’ gross effects, not only the net effects, are likelyto be negative.

5. Environmental consequences of hard coal production

If hard coal production were to completely cease today,one might avoid large quantities of greenhouse gasemissions, particularly methane, which is more than 21times more harmful than carbon dioxide (CO2) in warmingthe planet. Methane is a hazard in underground mines andmust be vented in order to prevent explosions. Methaneemission rates from hard coal mines in Europe aregenerally 50–100% greater than those in the majorexporting countries (Steenblik and Coronyannakis, 1995,p. 547). Hence, substituting imported coal for Europeanhard coal upon closing down mines would not only make aconsiderable contribution to meeting the European climatetargets of the Kyoto Protocol, but would also reduce theglobal greenhouse gas output.

In Germany, for instance, the CO2 emissions originatingfrom the hard coal mining sector amounted to 2.7Mt in2002. Within the array of voluntary commitments toclimate protection offered by the German industries, it isthe declared aim of this industry to reduce its annual CO2

emissions to 2.3Mt by 2012 (Frondel et al., 2006, p. 211).Abstaining from the foreseen production of 16Mt in 2012would, therefore, lead to a reduction of more than 2Mt ofCO2 emissions per year and roughly 250,000 t of methane,given the methane emissions rate of 15,230 t per Mt of coalprovided by Steenblik and Coronyannakis (1995, p. 548).Based on a global warming factor of 21, avoiding 250,000 tof methane would reduce greenhouse gases by more than5Mt CO2 equivalents per year.

Moreover, as a result of the artificial extension of hardcoal mining in Germany, attention is increasingly focusingon other environmental damages, such as the potentialcontamination of aquifers as well as substantial miningdamages of private buildings. These damages, inducinginstability and potential destruction of private houses, areultimately borne by society as a whole through the

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whit

Fig. 5. Number of employees in 1000 in the German hard

subsidies provided for the mining company. The largenumber of people who are organized in initiatives confirmsthat they are strongly affected by coal mining. If coalmining continues, these damages will become even morepronounced.In sum, the continuation of subsidies for hard coal

mining is not only dispensable with respect to ascertainingenergy security, and not only highly questionable as aninstrument to provide economic stimulus, it is alsoharmful. Hard coal mining causes significant environmen-tal and individual damages, be it the partial or completedestruction of houses or losses in the value of buildings andproperties. Hence, even the subsidies’ gross effects arelikely to be negative, if these damages are included inquantitative assessments.

6. Social consequences of dismantling hard coal production

A final major argument often used against dismantlingsubsidies is that this would imply the long-term unemploy-ment of all the employees of the German hard coalindustry. As these employees are said to be very welltrained, however, their prospects on the labor marketought to be comparatively bright. In fact, unemploymentin Germany is largely a problem associated with a lack oftraining and marketable skills (see e.g., Schmidt et al.,2001). Thus, it appears to be extremely unlikely that allemployees would remain unemployed for a long time afterthe closure of the last of the 8 currently operating mines.In addition, given their low numbers compared to past

layoffs, it is difficult to imagine that the integration of thepresent mining workforce into the unsubsidized labormarket would pose such a severe challenge (see Fig. 5). Bythe end of 2005, the number of mining employees wasabout 38,500 (Coal Statistics, 2006). Compared to the1960s and 1970s, when several hundred thousand employ-ees belonged to this industry, this figure is relatively small.In fact, reducing the industry’s workforce by 38,500employees was achieved in those decades within a coupleof years. Relative to the total number of unemployedpeople in Germany, averaging more than 4.8 Mio in 2005(Destatis, 2006), this figure is rather negligible. Further-more, in the worst case scenario in which all mining

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employees become unemployed, the unemployment rate of11.6% in 2005 would only rise by 0.09% points.

To specifically mitigate social disruptions, it would bemore efficient if the mining employees were supporteddirectly (IEA, 2002, p. 72), for example in the form oftransitional benefits for a limited time, combined withincentives to quickly switch to a new job. Payments couldalso ensure additional training for those with problems onthe labor market. The funds required for this purposewould only be a fraction of the cost of continued coalsubsidies, since subsidies, when expressed on a per-employ-ee basis, are several times the average wage per miner(Anderson, 1995, p. 485, 495). Finally, domestic hard coalproduction would not cease suddenly, but would last atleast until 2008, currently the last year for which subsidiesare already legally guaranteed. Thus, both the employeesaffected as well as the related upstream sectors would havesufficient time to search for alternative employment.

7. Summary and conclusions

Year after year, billions of euros are spent for hard coalsubsidies in Europe, most notably in Germany, where thesesubsidies currently amount to about h2.6 billion (EC,2006b). While hard coal is still produced in several OECDcountries in Europe, for instance in Spain, Great Britain,and France, it was Germany that granted by far the highestsubsidy per tonnes of coal among these countries in the lastdecade of the twentieth century (IEA, 2002, p. 68). Withoutthese subsidies, hard coal production in Europe would notbe competitive due to geological disadvantages. Yet, theproduction is not only impossible without any state aid, italso has harmful consequences, such as mining damages ofbuildings, and contributes to a range of environmentalproblems, most notably via the emission of greenhousegases. What is even more important is that scarce resourcesare directed from more competitive, progressive sectors ofthe economy to obsolete structures, thereby exacerbatingpublic deficits. Nonetheless, the German government ismiraculously considering the continued subsidization formore than another decade, implying that new coalfieldshave to be opened and additional permanent costs will beinduced due to the necessity of reducing the ground waterlevel in the mines.

This article has identified a number of key argumentsthat are repeatedly put forward in favor of hard coalsubsidies. These arguments, nurturing the economic fearsand anxieties of the general public, are anything but well-founded. The first line of arguments rests on the security ofenergy supply, raising concerns about a growing depen-dence on imports of increasingly scarce raw materials. Ofcourse, at times when energy and raw material prices arehigh, energy security arguments find particularly highacceptance. While raw material markets are well known forcyclical developments with alternating high- and low-pricephases, one has to recognize that the situation in theEuropean power markets has significantly changed since

their liberalization in 1998. As a consequence, the securityof energy supplies has now become the responsibility of theprivate power industry, rather than national governments.To avoid short-term bottlenecks, electricity generators, aswell as steel producers, can store imported coal, ensuring amuch more efficient supply security than by subsidizinghard coal, while a growing world market offers reasonablelong-term supply security (IEA, 2002, p. 70).A second line of arguments refers to the cost and benefits

of subsidies. It is generally argued that subsidies initiatemultiplier effects, conserving not only jobs in the sub-sidized sector but also creating substantial employmenteffects and value added in up- and downstream sectors.Yet, we have highlighted the importance of consideringcounterfactual situations, rather than only the status quo,and argue that, if hard coal funds were to be discontinued,there would be significant additional scope for future-oriented policies. The tremendous amount of much morethan h130 billion that has been employed for hard coalfunds over the past 50 years could have been used to amuch greater benefit elsewhere, for example in education orresearch and development of future energy technologies.Indeed, such expenditures of public funds would havelikely generated much larger multiplier effects than thosefrom hard coal subsidization. In addition, it would be lessharmful for the environment if hard coal production wereto be abolished as soon as possible. Above all, greenhousegas emissions would be reduced by more than 7Mio t ofCO2 equivalents per year—almost 1% point of the GermanKyoto target of a 21% reduction of greenhouse gasesrelative to 1990.The third line of arguments stokes anxieties about a

further growth in unemployment, as mass redundancies arethreatened if coal subsidies are abolished. To specificallymitigate social disruptions, it would be more efficient if theworkers currently employed in the subsidized hard coalmining sector were directly supported, for example in theform of transitional benefits for a limited time, combinedwith incentives to quickly switch to a new job. The fundsrequired for this purpose would be only a fraction of thecost of continued coal subsidies.These considerations have clearly shown that there are

no convincing arguments whatsoever for the continuationof hard coal subsidies in Europe and particularly inGermany. Politicians would be well advised to rapidlyabolish these subsidies and set a clear deadline for thisabolition as was recommended by the International EnergyAgency (IEA, 2002, p. 72). As a consequence, it wouldbecome easier to, first, argue for the necessary discontinua-tion of other subsidies and tax concessions and, second,reduce public deficits, whose level has been criticized by theEuropean Commission for several consecutive years.Ultimately, it would be fundamentally inconsistent if theEuropean Commission were to punish Germany forexceeding public deficit thresholds while simultaneouslyaccepting substantial subsidization of hard coal produc-tion.

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