Deutschland 2030

Jul 07, 2023

Germany Needs Real Change. The Key? Climate Policy

The German economy is already paying the price for having put the green energy transition on the backburner. To win the future, it needs four “Ds”: Decarbonization, digitalization, decentralization, and democratization.

Electrical power pylons with high-voltage power lines are seen next to wind turbines near Weselitz, Germany November 18, 2022.
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"I want to have my cake and eat it too.” This is the motto that has guided Germany's energy and climate policy until now. If anything, though, energy and climate policy in the course of the last 15 years has been based on the refusal to break the eggs needed to bake the cake in the first place. The result was the country’s biggest energy crisis, and a dangerous dependence on fossil fuel autocrats, namely Russian President Vladimir Putin.

This has led to the current situation, in which Germany is far from achieving climate policy goals in many sectors. Above all, turning away from fossil energy not only reduces dangerous dependencies, but costs too, which will lead to permanent benefits. The political class has now recognized this and makes it clear that we must indeed break eggs, ceasing to install fossil oil or gas heating systems, and switching to sustainable heating systems including heat pumps.

The Energy Crisis and Inequality

Certainly, the focus must now be on ensuring that there are sufficient support programs, that enough workers are trained and educated, and that possible material bottlenecks are counteracted. The fact that these exist at all is the result of living in cloud cuckoo land and “break no eggs” politics, which is exactly why the politicians are now, at last, changing course. Whether this course change will be successful is unclear, though, because the fossil fuel industry, with its PR campaigns, is still going strong. All attempts at implementation are shouted down. We are all too familiar with the spectacle of targeted “sowing of doubts” regarding change or, in this case, complete rejection of it.

And the poison created by doubt is hitting a society currently shaken by multiple crises. The social-ecological crisis, especially the climate crisis, is accompanied by strong social inequality—a trend that has been further exacerbated in Germany by the COVID-19 pandemic and the energy crisis. Households have had to forgo income due to reduced work hours and are now suffering from rising energy prices and inflation, and are not sufficiently compensated because of lower wage growth.

A lack of cohesion and increasing social inequality can lead to social polarization and a declining acceptance of political measures, complicating political decision-making processes for crisis management and transformation. Crisis policy should therefore not only be about good energy, climate, industrial, and economic policy, but also good social policy—promoting participation in shaping socio-ecological transformation. This is precisely what interested parties are currently trying to prevent.

Everything imaginable is being done to prevent the move away from fossil fuels. We can currently watch the drama playing out regarding the (fossil) combustion engine just as we can with the (fossil) heating system. As soon as attempts are made to initiate solutions with modern, emission-free heating or tank systems, they are torn apart. Facts are twisted and castles in the air continue to be built so that everything can remain as it is now; emission-free fuels will "miraculously" come to us. The fact that the costs for e-fuels are five times as high, because of their expensive production by means of green electricity and CO2 separation, is concealed. Just like the rising CO2 prices, which are currently still capped, but which will (have to) rise massively if they are determined solely by the market across all sectors.

Because of the need for a steering effect, a fixed emissions budget must be adhered to, and the construction and transport sectors must reduce emissions. We are running out of time and we find ourselves—yet again—in endless circular debates about the alleged downsides of change and a collective silence regarding necessary changes. “Having our cake and eating it” no longer works. It’s time for a reality check, along with a genuine change that brings plenty of benefits.

Doing Right and Wrong Things

German energy and climate policy is currently doing a lot right, but also a lot wrong. It is correct that, finally, everything must be done in the heating sector to ensure that buildings are better insulated and fossil heating systems are increasingly dispensed with. At best, the problem with the implementation is that it will be rushed, with too little reaction to counter campaigns; targeted campaigns with which people are being persuaded to be afraid. More transparency and clarity would be helpful. It is also true that the expansion of renewable energies is being advanced, even if the pace needs to be accelerated further.

A major mistake, on the other hand, is amending the Climate Act and the abandonment of sectoral emissions reduction targets. The fact that the transport sector is also lagging behind its specified targets should not be taken as an opportunity to roll back the targets. In times of climate crisis and increased public dissatisfaction with the implementation of climate protection measures, this is the worst option. It is counterproductive to soften the targets instead of introducing effective measures.

Similarly problematic is that Germany is not learning enough the lessons from the mistakes of the past, and is still relying far too heavily on fossil gas. In this context, far too many fossil-fuel natural gas terminals are being built. This is endangering the energy transition.

The time to pretend that we still have decades to finally take action is over. We lost 20 valuable years during which the industry made us believe that it “had to buy time” and needed "bridging technologies" to effectively achieve the goal. As we know today, these were fairy tales and myths. But from the fossil fuel industry's point of view, that's how it could, and should, continue. Even today, it claims that "things won't happen that quickly" and that more time is needed. We no longer have this time. The time for action is beginning. Hopefully. Finally. Because the benefits of change and transformation are great.

Accelerating the Turnaround

Energy security and easing the burden on households and the economy are rightly at the forefront of policy. In order for industry and the economy to become independent of fossil energy in the long term and to benefit from the price-reducing effect of renewables, the energy turnaround must be accelerated. Policymakers should provide incentives for investment in energy conservation and transformational innovations.

Taking into account climate protection targets and the remaining emissions budget, it becomes clear that reactivating the use of nuclear and/or prolonging the use of coal energy as well as an oversized liquefied natural gas infrastructure, can neither help to reduce fossil dependencies in the long term nor make the economy future-proof and crisis-proof. A good energy and crisis policy is therefore also a good crisis, economic, and industrial policy and supports the needed social-ecological transformation.

Industry is very important for the German economy. As part of the transformation, production processes are being geared as far as possible toward climate neutrality. For example, vehicle production must obtain the steel it needs from CO2-free processes. This can be achieved, for instance, by changing the way blast furnaces operate. Instead of coal, hydrogen produced from renewable energies could be used.

Since around 50 percent of all blast furnaces will have to be replaced in the coming years for reasons of age in any case, the time is right to retrofit them now in a sustainable and climate-friendly way. Green hydrogen is also essential for the chemical industry and as a fuel for heavy goods vehicles, ships, and aircraft in a climate-neutral economy. The automotive industry also needs to convert production processes. In the private vehicle sector, greater emphasis must be placed on electromobility, while climate-friendly drive systems are needed in the heavy-duty sector.

Tackling the Investment Backlog

For a long time, the German economy, especially industry, has suffered from a lack of investment. This investment backlog can also be overcome through targeted, transformative economic aid: For example, for digitalization—in the form of smart grids, charging infrastructure, climate-friendly fuels, battery and solar cell production—or hydrogen, for heavy industry. Rail transport must also be strengthened. Only then will the transformation to a climate-neutral economy—long since made binding under international agreements—succeed.

Many companies have been reorienting themselves for some time and are already investing in climate-friendly technologies such as converting their steel production to use hydrogen or climate-friendly fuels. If policymakers look backward instead of forward, companies run the risk that their investments will become unprofitable and that they will not succeed in further conversion due to such political delays. These companies need planning security and reliable framework conditions in the long term. This includes compliance with climate resolutions.

The German economy will have to invest in important structural transformation to achieve climate targets in future markets. In addition, public and municipal investments, especially to improve infrastructure, must be strengthened. Investment programs will strengthen the potential for the growth and resilience of the German economy. This in turn will also facilitate the future repayment of any debts accrued. In addition, investment programs will boost overall economic demand. A targeted economic recovery program will open up the opportunity to consistently align the German economy sustainably through investment and to advance the necessary socio-ecological transformation.

Avoiding Climate Policy Insolvency

At the European Union level, the Green New Deal was adopted at the end of 2019. Its program is the decarbonization of the economy, the expansion of renewable energies, and transformation of transport. As in Germany, however, economic aid should have been geared even more consistently to climate protection and sustainability.

It would be desirable to strengthen investment activity. The necessary transformation toward digitalization and sustainability should be supported in a more conscious and targeted manner. Decarbonization, digitalization, decentralization, and democratization are fundamental to achieving goals. Digitalization, in particular, plays a central role everywhere. More urgently than ever, we need decentralized networks that are digitally linked to form virtual power plants. Technically, it's no problem for houses to generate more energy than they consume. These are small power plants that we can interconnect. This is a huge opportunity for the digital energy transition!

The best debt brake is climate protection. To be fit for the future, we need to shift toward climate protection and sustainability. This is the only way to avoid a permanent over-indebtedness for future generations. Only if we take countermeasures now will we avoid climate policy insolvency.

Claudia Kemfert heads the energy, transportation, and environment department at the German Institute of Economic Research (DIW Berlin) and is professor of energy economics and energy policy at the Leuphana University, Lüneburg.