28 January 2022

The EU is on the road to a green planned economy

By Rainer Zitelmann

If you needed proof of just how badly the European Union’s understanding of market economics is dwindling, just look at three of its flagship environmental policies.

First, Brussels has set fleet-wide CO2 emission targets for car manufacturers, essentially telling car companies which vehicles they should produce. Then there’s the new ‘Taxonomy’ regulation, dictating which investments qualify as ‘sustainable’. And now we also have a revised ‘Energy Performance of Buildings’ directive, which imposes comprehensive renovation and decarbonisation obligations on property owners.

It seems regulators and politicians in Brussels have forgotten the most basic elements of a capitalist economy – that it is companies who decide what they produce, and consumers whose preferences decide whether businesses succeed or fail, with both production and consumption informed by market prices. In socialist economies, by contrast, there are no real prices and it is centralised state planning authorities who decide which products should be produced and in what quantities.

Of course, none of these systems exist in their purest form anywhere in the world. In the real world, all systems are mixed. In socialist countries there were and are residual elements of market economics (otherwise they would have been even more short-lived). Likewise, capitalist countries feature elements of planned economies (which often hinder the functioning of the market economy). The problem – as we’re seeing in Europe now – is when the balance shifts more and more towards a planned economy.

Take the emission targets being imposed on car manufacturers. It is no longer the companies – or, ultimately, their customers – who decide which cars are produced, but the EU superstate. Oliver Luksic, a politician with Germany’s classical liberal Free Democratic Party, hit the nail on the head with this comment:

‘We have entered the age of the green planned economy when it is no longer supply and demand but the state that determines which cars are built. Instead of openness to technology, the focus is solely on battery-powered electromobility, which in itself, however, does not represent progress or innovation.’

But rather than fight the tide of regulation, the car companies dutifully conform and plead for their share of state subsidies. Reports with titles such as ‘Volkswagen Group over-fulfils EU CO2 fleet targets for 2020’ are grimly reminiscent of the socialist GDR.

The same socialist logic applies to the Taxonomy Regulation, which establishes criteria for determining whether an economic activity qualifies as ‘environmentally sustainable’ or not. Again, it is no longer companies, but politicians and civil servants who determine which investments should be made. The impact of governments making such decisions can be seen from the current debate on whether nuclear energy and gas should qualify as ‘sustainable’. Members of Germany’s Green Party are opposed to nuclear energy for ideological reasons, while the French are for it. The result is an investment landscape shaped by political considerations and compromises instead of market forces.

If the emissions targets and sustainability edicts weren’t bad enough, the European Commission also wants to oblige member states to enforce minimum energy performance standards. that means property owners will have to modernise their buildings by 2030 in accordance with the strictest specifications, while public buildings will need to be renovated by 2027. This is not some peripheral measure either: about 15% of the approximately 220 million homes in the EU will be affected by the mandatory renovation directive. It’s a piece of regulation that could have been written by a lobbyist for the insulation industry. For the housing industry, meanwhile, an unconditional obligation to achieve certain standards – with penalties for non-achievement – is tantamount to expropriation, especially for certain buildings where implementing the new standards is actually impossible.

It’s 100 years since Ludwig von Mises published his epochal work Socialism: An Economic and Sociological Analysis, in which he proved that socialism cannot work because there are no real prices when the state determines what is produced. He’s since been proven emphatically right by the repeated, dismal failures of planned economies. It’s dismaying, therefore, to see politicians in the supposedly capitalist West repeating the same errors that have led to such misery elsewhere. It just goes to show that Hegel was right when he said that: ‘What experience and history teach is this: that peoples and government have never learned anything from history, or acted on principles deduced from it.’

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Rainer Zitelmann is the author of the book The Power of Capitalism (https://the-power-of-capitalism.com/).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.