Conflict and Leadership
Germany’s Green Transition: Will It Continue?

Russia is confronted with a new challenge: The global carbon neutrality transition sends the country’s export markets for coal, oil and likely even natural gas on a long-term decline. This is at least going to happen, if most bigger economies stay committed to the Paris Climate Agreement of 2015 with its target of limiting the temperature increase to well below 2°C, striving for 1.5°C. Between 2015 and 2019, according to a recent study, 64 countries worldwide have already reduced their CO2 emissions, amongst them Germany and the EU as a whole. But how likely is this development to continue? The EU and Germany are often portrayed as leading the global green transformation. Oldag Caspar looks at their transition in order to add clarity on where the world is heading.

Traditionally, Germany likes to be seen as one of the environmentally more cautious nations. It indeed was one of the first countries globally that had an environment ministry (since 1971 in East and 1986 in West Germany). Germany started to discuss climate change as a major threat in 1986, when the issue for the first time appeared on the front page of Der Spiegel. Consequently, in 1995 at the historically first United Nations climate summit in Berlin, Helmut Kohl and his then-environment minister Angela Merkel announced a CO2 reduction goal of minus 25% below the 1990 level until 2005.

However, Germany has not always been the climate leader it wanted to be. For the country was too much dependent on its luxury cars automotive industry, on its chemicals and steel industry and on coal that provided half of the country’s electricity for decades. It was the lobby power of these industries that often prevented successive federal governments from implementing the measures necessary to set a credible zero-carbon development course. In effect, Germany missed not only its 2005 emissions reduction target; it also almost missed its 2020 target of -40% emissions below the 1990 level. Germany finally met the 2020 climate target only because of the Covid crisis and the EU’s successful reform of its emissions trading system (ETS). The reform resulted in a carbon price surge and made burning hard coal unattractive.

Global Corporations and Economy
Emissions Trading Systems: Trajectories for Development
Yaroslav Lissovolik
In the past several years, we have witnessed a very important shift in the de-carbonization agenda of the world economy as all of the main players have advanced greater ambitions in this area. There appears to be a global consensus shaping up on the need to advance the de-carbonization agenda and the development of ETS systems. Given these trends, there appears to be sufficient scope to create a platform for bringing the standards in national and regional ETS systems into greater conformity, writes Valdai Club Programme Director Yaroslav Lissovolik.

The EU in the driving seat

Emitting a tonne of carbon in the EU costs industry and power sector companies now around 40 euro, up from around 8 euro in 2018. Due to the ETS reform, it is furthermore unlikely we will see low prices ever again. This structurally new situation is quickly changing the energy landscape by boosting renewable energy, killing coal and prospectively reducing the use of natural gas.

Another game changer are the new emission standards for cars and vans, which the EU set in 2019. The new standards play now an important role in ending the combustion engine quicker than many believe. The electric mobility revolution has started. 2020 saw almost a three-fold increase in sales of new electric cars in Germany, if compared to 2019. Volkswagen just stated that 70% of their EU sales will be electric or hybrid until 2030. Renault has announced it wants to sell the last classical combustion vehicle by 2035. However, these plans may soon be overturned by reality. The European Commission is already working on a new draft with probably even tighter vehicles emission standard. The draft will be part of the European Green Deal and a major climate policy package the Commission will publish in June/September 2021. The Green Deal package covers all sectors of the economy and aims at massively accelerating the speed of the green transition.

After decades of Brussels’ hesitation, the European Commission and the EU Parliament have now become the most essential institutions on the European continent when it comes to driving the green economic transition. But can Brussels continue being a decarbonisation locomotive?

For fighting global heating multilateral cooperation is vital. As the EU has always seen itself as a keen supporter of cooperation and multilateralism on a European and global scale, it has since the 2000s felt a special responsibility for preventing the climate crisis.

However, for many years the European Commission had been afraid that a too ambitious climate policy could disintegrate the EU into old Western and new Eastern member states. Following the United Kingdom’s Brexit vote in 2016 and the surge of EU sceptical populist parties in many member states including Poland, former European Commission President Jean-Claude Juncker’s first concern was the EU’s unity. This approach gave lee wind in EU-internal climate policy negotiations to exactly those Eastern member states with high dependencies from coal or the car industry, with low public awareness of the looming climate crisis and fresh memories of the transition burdens of the 90s and 2000s.

Today, this difficult situation has changed profoundly. The rise of radical populism has come to a halt. In 2019, the climate crisis became a headline and therefore a top political issue in almost all EU member states. Throughout that year, millions of ordinary people, driven by a perennial drought and other extreme weather phenomena were marching the streets of EU countries, demanding accelerated action on curbing greenhouse gas emissions. During the 2019 elections to the EU Parliament climate change ranked as No 1 concern of EU voters. The next Commission had no choice. In her July 2019 address to the opening session of the new EU Parliament, presidential candidate Ursula von der Leyen announced climate policy to become the new Commission’s top priority.

As a result, the EU is now about to finalise the surprisingly ambitious improvement of its current 2030 emissions reduction goal of -40% below the 1990 level to “at least -55%” or even several percentage points more. That would triple the yearly greenhouse gas reduction speed, if compared to the last 30 decades. A new long-term target of carbon neutrality until 2050 (up from the former “minus 80 to 95 percent”) had already been adopted in December 2019. Studies show that the EU economy could benefit from these new climate targets.

Even during the Covid pandemic, the climate crisis remained a top concern for people and many governments in the EU. What’s more, the massive climate protests may flare up again, as thousands of citizens are still in mobilisation mode and the climate crisis has only begun to unfold. The situation has changed so much that even in case of a major economic crisis, the EU will likely remain a global decarbonisation transition leader.

How the Climate Agenda Will Change Our Lives
Anton Bespalov
Climate change, which only recently seemed to be an issue for a small group of scientists and environmentalists, has become a universal concern. We showed in the first two parts of the Climate and Politics project that climate issues are now on the agenda of both politicians and business people. The third part is devoted to the impact of climate change and the fight against it on the transformation of societies.

Germany: the deep decarbonisation starts now

Not only the EU, Germany, too, has made a profound leap forward in the last years. When in 2018 it became obvious Germany may significantly miss its domestic 2020 emissions target of -40% below the 1990 level (not to be confused with the old 2030 EU target), this sent shock waves through the country. It also fuelled the discomfort within voters that politicians are not acting fast enough on the climate crisis. As a consequence, the Bundestag adopted a “climate law” that establishes a framework which gives future governments almost no choice but to reach the emission targets. The parliament also introduced a new domestic carbon price for transport and heating that rises over time and that makes driving petrol or diesel cars increasingly less attractive, as well as fuel oil and gas heating.

Germany’s problem is that most low-hanging fruits, such as energy efficiency improvements in industry, have been harvested already. That is why German industry emissions have stagnated over the last 10 years. Now, in order to achieve further significant emissions reductions, the deep decarbonisation needs to get started. It means companies and people from this point on have to change their way of doing business and organising daily lives. Exactly this is what we begin to observe.

For instance, in contrast to the very recent past, German energy-intensive industry has begun to largely support the goal of carbon neutrality by 2050 and did not obstruct the EU process to lift the 2030 target. Many companies have since 2019 pledged own climate targets that more or less support the national targets. This includes coal power plant operators, steel and cement producers. Even the car industry has largely understood that it needs to act fast in order to not let the doors of their factories close forever. Many of these companies will have to re-invent at least significant parts of their business model. And a large number of businesses has finally understood that solving the climate crisis is increasingly becoming a business case.

We are observing a remarkable paradigm shift. Before 2018, a clear majority of political and business decision makers in Germany and Brussels was convinced that being a decarbonisation leader may on the one hand be a moral obligation but is a major economic risk on the other. Now, many of the same people have become worried about Germany’s and the EU’s place in – as it is increasingly dubbed – the global “race to zero”.

With remarkable 20% of current voter support, the Greens will likely become part of the German government after the general elections in September. That would give a further impulse to climate policy in the EU and Germany. Still, any kind of next government will have to overcome difficult obstacles on the bumpy deep decarbonisation road. Boosting renewable energy growth (currently at 50% of German electricity production) is one of them. Coming to terms with trade partners on green hydrogen imports is another. It nevertheless does not seem too bold to state: Germany and the EU are entering the deep decarbonisation phase. There are no signs they will backtrack anytime soon.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.