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How Germany plans to build on Covid-induced emissions dip

Germany prioritises its renewables build-out, electric vehicles and hydrogen in a Covid-19 recovery plan that seeks to extend the Energiewende from the power sector to the rest of the economy.

Germany is the birthplace of the Energiewende, or energy transition. Rooted in the anti-nuclear movement of the 1970s, it has evolved into a full societal shift away from fossil fuels towards renewables in an effort to avoid dangerous climate change. It is largely thanks to Germany – and more specifically its public purse – that wind and solar power are as competitive as they are today. It may, in no small way, be thanks to Germany too that renewable hydrogen follows in their footsteps in the years to come.

Merkel-in-EV
German Chancellor Angela Merkel sits in a Volkswagen ID.3 electric car during a tour of exhibition halls at the IAA 2019 Frankfurt Auto Show. (Photo by Sean Gallup/Getty Images)

In an analysis of climate and energy spend in the Covid-19 recovery plans of several major European economies, however, Germany does not emerge as the greenest of the bunch. That honour goes to Spain, France and surprisingly, Poland.

Energy Monitor has analysed policies recorded by the Energy Policy Tracker, an online database maintained by environmental think tanks. According to an analysis of six different countries, Poland has so far invested the greatest share (82.3%) of post-Covid energy and climate-relevant spend in clean energy. That compares with 60.6% for Germany, about the same as France. Germany has invested the biggest absolute amount in a green recovery – €42.4bn ($50bn) – but it has also bailed out its traditional industries.

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It is a “big mistake” to spend 40% of post-Covid funds on fossil energy, says Frank Steffe at Berlin-based think tank Agora Energiewende. “There should be no funding for fossil energy or fossil-based industry anymore,” he says. “The fight against the pandemic and huge programmes at the national and European level are an opportunity to put the strongly needed economic transition on the right course.”

‘Building back better’

Germany met its 2020 climate target thanks to Covid-19. In 2018, the government conceded it was widely off course to deliver a 40% emissions reduction, compared with 1990 levels. Additional policies initiated in 2014 failed to close the gap. The government blamed “surprisingly strong” economic growth and immigration. The Organisation for Economic Co-Operation and Development said the credibility of Germany’s climate policy was on the line.

Covid-19 finally helped deliver what policymakers could not: the missing 8%. Germany’s greenhouse gas emissions fell by 8.7% in 2020, bringing the total decrease to 40.8% from 1990, announced the German Environment Agency on 15 March 2021. It attributed around a third of the drop in 2020 to the coronavirus crisis.

Germany’s post-Covid €130bn economic stimulus programme is an effort to ‘build back better’. The German Association of Energy and Water Industries (BDEW), the largest energy industry association in Germany, applauds the government’s “focus” on energy and climate in the package. The measures needed for Germany to achieve future climate targets would trigger investments of €320bn in the energy sector alone, concludes an EY study commissioned by BDEW – and those investments come with 270,000 jobs. “Sustainability is not a cost factor, but an economic factor,” BDEW says.

At the heart of the stimulus – and Germany’s future climate plans – is the build-out of renewables. Germany’s most expensive green recovery measure is €11bn set aside to lower the cost of the renewables levy added to German domestic electricity bills. The levy will be capped at €0.065 per kilowatt-hour (kWh) in 2021 and €0.060/kWh in 2022, down from €0.068/kWh in 2020. The pandemic had threatened to raise it – to a record €0.088/kWh, estimated Agora Energiewende – due to the slump in electricity demand during the crisis and lower wholesale power prices because of lower natural gas prices.

One of the biggest questions facing Germany is how to finance the continued roll-out of solar and wind power without putting more pressure on households, which already pay the second-highest power prices in Europe (after Denmark). The plan in the long run is to use carbon market revenues from a national CO2 price on petrol, diesel, heating oil and gas for heating that was introduced in 2021. Germany is targeting 65% renewable power by 2030. Cheap, clean power is at the heart of the government’s plans to extend the Energiewende to transport, heating and industry through electrification and power-to-X.

Going all out for EVs

Transport has historically been the most problematic sector from an emissions point of view. The pandemic’s effects were “especially” noticeable in the transport sector, German environment minister Svenja Schulze has admitted. Most of the 11.4% (19 million tonnes of CO2) emissions reduction in transport last year came from fewer cars being driven during the first national lockdown, especially for long-distance journeys. Only 10.5% of the reduction was due to more electric vehicle (EV) registrations and biofuels. This means emissions risk rocketing up to previous levels in step with economic recovery.

Except that Germany is going all out for EVs. Germany’s stimulus package contains more than twice as much money for EVs as it does support for the traditional internal combustion engine. The significance of this, in a country where the car industry is such an integral part of the economy, is hard to overstate. German carmakers have turned to EVs first and foremost to comply with stringent new EU standards for car fleet CO2 emissions, but they also face impending phase-outs of conventional cars in key export markets (40% of exports affected) and believe the future lies in “connected” cars and autonomous driving.

Of the German carmakers, Volkswagen (VW) has made the biggest commitment to electromobility. From the ashes of ‘Dieselgate’ should rise a “climate-neutral, software-driven mobility group”, said CEO Herbert Diess at the company’s annual media conference on 16 March 2021. He talked about the “rebirth of the VW brand […] propelled by our electric push”.

The plan is to use cash flows from conventional cars to invest in EVs and software. VW does not intend to cease production of the internal combustion engine but it does want to grow EVs as a share of its total sales. By 2025, 20% of sales should be electric. This is a tall order: in 2020, VW delivered 230,000 EVs, three times more than in the previous year, but just a few per cent of its overall sales.

There should be no funding for fossil energy or fossil-based industry anymore. Frank Steffe, Agora Energiewende

VW and others will benefit from billions in Germany’s stimulus package. The government resisted calls for a buyer’s premium for all cars and instead doubled subsidies for EV buyers from €3,000 to €6,000 per vehicle. It has set aside €3.2bn for this exercise from now to 2025. This effectively makes it easier for manufacturers to comply with EU car CO2 standards, says Günter Hörmandinger, deputy executive director at Agora Verkehrwende, a sister organisation to Agora Energiewende. The goal is to have ten million EVs on German roads by 2030.

NGOs are unhappy that plug-in hybrids are also eligible for the subsidy. “The official test assumes you basically drive electric whenever you can,” explains Hörmandinger. “The reality is that people don’t. We have real-world data, which shows emissions are two to four times what is in official tests.” One possible explanation is that people opt to refuel company cars with company refuelling cards rather than home electricity.

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Germany will require all petrol stations to offer EV charging points in future with €2.5bn in the recovery package to support the roll-out of charging infrastructure.

In addition to cars, buses and trucks get a €1.2bn programme to promote “alternative drivetrains”. There is also a €1bn scrappage scheme for old trucks that does not exclude new diesel engines but privileges electricity and hydrogen. Aviation and shipping get €1bn each to clean up their acts too. Germany is pioneering an e-fuel mandate for aviation that would start at 0.5% in 2026, rising to 2% in 2030.

For all the fanfare however, Germany still risks spending considerable sums on fossil fuels in the transport sector. The €1bn to clean up aviation pales in comparison to the €9bn bailout for national air carrier Lufthansa, with no notable environmental strings attached. The €1bn for shipping promotes LNG, which is cleaner than bunker fuel but still fossil. There is also €3bn set aside for innovation in the car industry and €2.5bn for local public transport. With no further details on how this money should be spent, it may prolong the life of the internal combustion engine. For many, this possibility is incompatible with Germany’s climate goals.

Hydrogen economy

Alongside renewables and transport, the third and last big pillar of Germany’s green recovery spend is clean hydrogen. Germany is planning to spend more on hydrogen than any of the other six countries analysed. It has set aside €9bn, €2bn of which is for the development of production partnerships with third countries for hydrogen imports. The other €7bn is supposed to help get 5GW of domestic electrolyser capacity up and running by 2030, as set out in the country’s national hydrogen strategy adopted in June 2020.

In addition to building up supplies, the German government also envisages support for demand, such as via the e-fuel mandate for aviation and carbon contracts for difference (CCfDs) for climate-friendly steel. Such CCfDs would top up the EU carbon price to make clean steel competitive.

Unlike other countries, Germany and France are clear they want to invest their billions in green hydrogen projects, with a limited, transitional role for blue hydrogen from natural gas with carbon capture and storage.

Green hydrogen can store renewable power and ease pressure on an overcrowded grid. However, green hydrogen and e-fuels also depend on renewables. Germany’s hydrogen ambitions, which it sees as a way of extending the Energiewende into industry and long-distance transport in particular, ultimately hinge on its renewable energy build-out, at home and abroad.

It makes sense that Germany’s biggest recovery budget is reserved for the support of renewables. Whether or not the country succeeds in creating a hydrogen economy, more wind and solar are a no-regret option. The upcoming national elections will be the real test and a first chance for the public to show if it agrees with its leaders’ post-Covid recovery plans. 

Related content:

Energy Monitor is running a special series of analyses of post-Covid-19 climate and energy-related spend and policies, to determine whether countries really are building back better.

The data behind this series is based on Energy Monitor’s interpretation of work done by Energy Policy Tracker. This tracks public money commitments and policies that could impact a green recovery post-Covid-19. Policies are assigned on the criteria of which energy technology they benefit and whether they have environmental strings attached. While the original source had five categories, we have opted to distinguish solely between whether a measure benefits fossil fuels or clean energy (or nuclear power).

The measures are very different in nature and include countries’ Covid-19 recovery strategies, national climate policies and bailout measures for companies. We brand the whole package of measures as Covid-19-related government policy responses from an energy and climate perspective.

Our measurement of a country’s performance may not be fully complete as certain measures, such as tax incentives or new taxes, may not be included in our methodology.

The data covers the period from March 2020 to 10 February 2021.

Sonja van Renssen

Editor in Chief Sonja van Renssen is an experienced Brussels-based journalist and conference moderator, who has written for leading energy and climate titles including S&P Global Platts and Nature Climate Change.