Germany

Germany’s current policies are “almost sufficient” when compared to modelled domestic pathways. With implemented policies, Germany’s 2030 target is in danger and it will not achieve its long-term targets.

The “Almost sufficient” rating indicates that Germany’s climate policies and action in 2030 are not yet consistent with limiting warming to 1.5°C but could be, with moderate improvements. If all countries were to follow Germany’s approach, warming could be held at—but not well below—2°C .

Further information on how the CAT rates countries (against modelled pathways and fair share) can be found here.

Since it came into power in December 2021, the German government has been significantly accelerating domestic climate policy implementation, but remains deeply divided on the general approach, reflecting the divergent positions of the different coalition parties. We observe that the Green Party is pushing for fast action, e.g. in buildings and for renewables, the Social Democrats and, in particular, the Liberal Party are delaying implementation. All parties support expansion of LNG terminals, which is counterproductive to climate policy.

The restructuring of the ministries at the beginning of the current legislature looked as though emphasis was given to climate action: there is now one Ministry of Economic Affairs and Climate, which lifts climate policy up the agenda. The Ministry of Foreign Affairs is now responsible for climate change negotiations, giving it prominence. The Ministries of Transport and Finance in turn have ministers from the Liberal Party, which has a far more lenient approach to climate policy than the Green Party.

We conclude from our review of the inventory (UBA, 2024b) and government emissions projections from March 2024 (UBA, 2024c), that the 2030 target is still in danger, even if the official projections claim that it will be met in aggregate. The official projections are very optimistic as they assume that the 80% renewable electricity target is met, CO₂ prices remain high and activity of emission-intensive industry remains low. Recent capacity additions for wind are not at all in line with that goal and CO₂ prices are currently lower than assumed. The government therefore needs to remain active to ensure that its own target is safely met.

We also find that the way the government plans to meet the 2030 target (UBA, 2024c) may make it almost impossible to meet the 2045 climate neutrality target for all sectors. The government weakened the climate change law in May 2024, replacing the compliance mechanism around binding sectoral targets with the ability for sectors to compensate for each other, as long as the overall target is met. Amending the compliance mechanism conceals the fact that the transport and buildings sectors will exceed their 2030 targets. It will be almost impossible for the transport sector to catch up after 2030 unless drastic and disruptive measures are taken, such as extremely high CO₂ prices or driving bans. Compensation by the other sectors is also not possible after 2030, as it will become increasingly difficult for sectors to avoid the last few tonnes of CO₂.

It is also worrying that Germany will miss the legally binding target within the EU effort-sharing scheme, in which transport and buildings are counted together. There is a threat of high payments, as any failure to meet the target must be offset by certificates. Overall, Germany will exceed its target by at least 126 MtCO₂e, costing German taxpayers, at a roughly estimated price of EUR 100 per certificate, EUR 12bn.

The new May 2024 climate law makes the whole government responsible for meeting the targets, rather than individual ministries. However, the previous law had explicitly placed individual ministries as responsible for achieving their sectoral targets, to make them accountable for climate policy in their respective sector. The May 2024 dilution of responsibility reduces the likelihood of Germany meeting its targets. The ministries of buildings and transport failed to submit the emergency programme required by the old climate law and have consequently been brought to court by NGOs.

In the coalition contract, the new government decided not to raise the ambition of the mitigation target, but promised the measures adopted in the coalition agreement would overachieve the target (ARD, 2021). Not only does the government still need to meet its 2030 target, it needs to enhance it, as it’s still not 1.5˚C compatible. Germany, along with all governments, have agreed to increase their 2030 action as part of UNFCCC decisions since 2021.

The coalition also wanted to introduce a climate check for each new law, but implementation has been slow. In early 2023, the Federal Environment Agency (UBA) tendered a project to consider possible approaches, the research was not completed as of June 2024 and a climate check has not yet been introduced.

To cope with Russia’s unlawful invasion of Ukraine and related energy security issues, Germany introduced a set of measures, some of which are counterproductive to climate policy. The government still plans to develop an overcapacity of LNG import infrastructure (Höhne et al., 2023; Marquardt et al., 2023), which risks a lock-in of fossil fuels and brings into question Germany’s long-term ambitions for GHG neutrality.

The coalition embarked on making the climate transition socially just, but has so far failed to do so in several areas: a climate dividend (“Klimageld”), to pay back revenues from carbon pricing on a per capita basis, was seeded in the coalition contract but will now probably only be implemented after 2025, under the next government (Deutschlandfunk, 2024). A temporary rebate on VAT for fuels and a compensation mechanism for high gas prices during times of very high energy prices were given without social differentiation. A positive step is that the new heating law differentiates the subsidies for CO₂-free heating systems by household income.

According to the targets anchored in the climate law, the energy sector (electricity and heat supply) will have to limit its GHG emissions to 108 MtCO₂e by 2030, a reduction of 62% below 1990 levels. In 2023, total emissions from the energy supply sector stood at 205 MtCO₂e, a decrease of 51 MtCO₂e compared to the previous year. Renewable energy covers half of gross electricity consumption for the first time, and coal-fired power generation declined as electricity demand decreased (Expertenrat für Klimafragen, 2024).

Despite these positive developments, the sluggish expansion of wind energy and the extensive new investments in gas infrastructure pose a risk to Germany's ability to achieve its longer-term targets for 2030 and 2045. A slow and gradual coal phase-out by 2038 puts pressure on global emissions budgets, which require a coal phase-out by 2030 (CAT, 2023).

The government intends to phase out coal by 2030, with phase outs already negotiated for the western coal mines and is attempting to do the same in Eastern Germany.

With the policies currently adopted, Germany could exceed its 2030 power sector target. However, the official projections from the UBA report assumes that the renewable electric capacity increases as in the government's original plans from early 2022. For solar energy, this has been the case. For wind energy, implementation has once again fallen behind in 2023.

The price for CO₂ emission allowances in the EU Emissions Trading System (EU ETS), has recently fallen steadily from a level of EUR 100/tCO₂ in February 2023 to a low of EUR 52/tCO₂ in April 2024, and is currently between EUR 60-75/tCO₂^[1]. With the reform of the EU ETS, it was expected that these prices would increase further. Higher prices make coal very unattractive compared to renewables.

^[1] Carbon Price Tracker | Ember (ember-climate.org)

Renewables

Accelerating renewable energy expansion is a priority of the German government and has been approached in a very comprehensive manner through increased targets and planned legislative measures that aim at overcoming very specific challenges for renewables in Germany.

The Renewable Energy Law (EEG) and the wind energy offshore law (WindSeeG) were revised in 2023, determining that renewable energy installations are of public interest so they can be prioritised over other issues, and give particular support for rooftop solar PV, increase the focus on participatory models for citizens, support storage, and redirect biogas towards flexible power generation (BMWK, 2023f, 2023d).

Electricity generation from renewables stands at 60% January to July 2024 (Fraunhofer ISE, 2024c).

The German government aims to raise the share of electricity generated from renewable energy to 80% of gross electricity consumption by 2030 (BMWK, 2022) while increasing overall electricity use to further electrify the transport, buildings and industry sectors. This goal is not yet fully aligned with the Paris Agreement but is getting close: studies suggest the share of renewable electricity in total generation needs to reach 85-100% by 2030 to be compatible with a 1.5°C pathway (Climate Action Tracker, 2023).

The government is aiming for capacity additions for solar PV and onshore and offshore wind to a total of 360 GW cumulative installed capacity by 2030 (30GW offshore wind, 115 GW onshore wind, 215 GW solar PV)(Federal Ministry of Economics and Climate Protection, 2022), more than twice the current capacity of 161 GW (Fraunhofer ISE, 2024a).

Solar capacity additions are ramping up at record levels, with the addition of 15 GW in 2023 alone, showing the effect of government policies. If the trend of the first six months continues, Germany will build an additional 15.2 GW of new solar capacity in 2024 (Fraunhofer ISE, 2024b). The government’s plan is to annually expand solar capacity by 22 GW each year by 2028 (Wirth, 2023), the realisation of which appears to be within reach if the pace of massive expansion continues. The installed capacity of solar energy increased by around 130% between 2012 and 2022 (IEA, 2024).

According to the government's targets on wind energy, an expansion of 14 GW would be required for 2023 and 2024. This would meet the 2024 EEG onshore wind target of 69GW and, assuming linear interpolation, the offshore wind target of 30GW installed capacity by 2030. In 2023 and 2024 so far, wind energy has only been expanded by 4.5 GW (Fraunhofer ISE, 2024b).

Onshore wind capacity expansion remains below its all-time high of 5.5 GW in 2017. In 2023, only an additional 3 GW were newly built (Deutsche WindGuard GmbH, 2024), half of the planned 6 GW (BMWK, 2022). This needs to be ramped up to 16 GW annually by 2029 to meet the government's target, five times faster than in 2023.

The government's own projections report assumes the expansion targets for wind are met, which we judge as optimistic. For our analysis, we use a range for wind expansion between fully meeting the target and only adding half the capacity each year.

As part of its National Hydrogen Strategy (German Government, 2020b), the government is providing EUR 11bn to support projects (BMWK, 2023a). The first auction of “Carbon Contracts for Difference” (CCfDs), through which the additional costs of companies compared to conventional production are compensated, was launched mid-March 2024 (BMWK, 2024b). The strategy was updated in June 2023, doubling the previous goal for electrolyser capacity from 5 GW to 10 GW in 2030 (BMWK, 2023c). The strategy also includes support for several projects to import green hydrogen to Germany from Australia, Morocco, Brazil and South Africa, and the development of an auction model for green hydrogen. Importing green hydrogen from distant countries such as Australia and South Africa calls into question its sustainability due to the significant emissions generated during transport. The hydrogen strategy explicitly includes hydrogen from fossil gas for an interim period.

Coal phase-out

The share of coal in the electricity system has been halved over the last five years, but still stands at 21% for January to July 2024, of which three-quarters are from lignite, the most emissions-intense form of coal (Fraunhofer ISE, 2024d). Roughly one third of CO₂ emissions from coal-fired electricity generation in Europe are from Germany (IEA, 2021).

In July 2020, the previous government adopted a coal exit law stipulating the last coal-fired power plant will be closed by 2038. The compromise was found only by compensating the affected regions (with EUR 40bn) and the affected companies operating the coal-fired power plants (with an additional EUR 4.35bn) (Agora Energiewende, 2019; Bundesministerium für Wirtschaft und Energie, 2019).

In November 2020, the European Commission approved its proposed competitive coal phase-out tender mechanism under the coal exit law (European Commission, 2021). In the first auction rounds between September 2020 and March 2022, the Federal Network Agency awarded bids for a combined capacity of around 9.7 GW (Bundesnetzagentur, 2022).

The operators received up to EUR 165,000 for each MW of installed capacity to be phased out by the end of 2022 at the latest and, in 2021, a total of 5.8 GW coal capacity was retired (Bundesnetzagentur, 2021, 2022; Global Energy Monitor et al., 2022).

A total of 15 lignite and hard coal-fired power plants in Germany were shut down by April 2024. This included seven lignite-fired power plant units with a capacity of around 3.1 gigawatts, which the German government had originally planned to shut down earlier. Due to energy-saving measures for natural gas during the energy crisis, the shutdown date for two of these units was postponed and the remaining five units were taken out of security standby (MDR, 2024; Zeit, 2024).

According to the coalition agreement, the government wants to phase out coal by 2030. However, there is no consensus on this among the federal states, and a legally required evaluation of the feasibility of the coal phase-out by 2030 by the federal government has not yet taken place. While the energy company RWE and the state of North Rhine-Westphalia agreed on a coal phase-out by 2030, the eastern German states recently emphasised their rejection of a phase-out of coal mining in the region by 2030 (Tagesschau, 2024b).

First attempts to move the coal phase-out to an earlier date have likely led to more greenhouse gas emissions according to our analysis: in early 2022, the largest coal operator in west Germany, RWE, and the state government of that region struck a deal under which the coal phase-out would be moved forward from 2038 to 2030 at the expense of moving the shut-down of some capacity originally scheduled for a 2022 closure back to 2024, in an attempt to save gas.

For RWE, this is probably a good deal because it will lead to more operating hours before 2030 than originally planned. After 2030 it would likely not have been viable to operate the coal-fired power plants anyway, because of the high carbon price expected from the revised EU ETS. This deal saved several villages from destruction. However, it did not save the iconic village of Lützerath as it was argued the lignite underneath the village was needed for energy security in Germany (RWE Power AG, 2023). This was contested by scientific groups (Oei et al., 2023), heavily criticised by civil society, and led to major protests.

Fossil gas

Fossil gas is currently providing 13% of Germany's electricity. Only 13% of gas is used in the electricity sector: most is used in industry and for heating (BDEW, 2024).

If renewables are expanded as planned and coal is phased out, the existing gas-fired power plants could provide the remaining electricity, if they run on a higher load. This is, however, unlikely, as with the large share of variable renewables, the flexibility of other sources in the system will need to increase and will need to cover peaks in demand, rather than running long hours. Building new gas peaker plants is expensive. While power plants that operate as combined heat and power (CHP) generation are more efficient, they are much less flexible, with only a limited ability to react to variations in the grid. The German government should carefully consider which combination of storage capacity, grid investments, demand management, and additional gas peaker plants is most (cost) efficient when moving to a high share of renewable energy. The stakeholder consultation process “Platform for a climate neutral electricity system” (BMWK, 2023e) is working to fill the current gap of an overall plan.

In its new strategy in February 2024, the government agreed to support four new gas-powered stations that would initially run on fossil gas, but would need to move to hydrogen between 2035 and 2040 (BMWK, 2024a). With this strategy, the government takes a transitional approach without a fully comprehensive plan.

As a reaction to the Russian invasion of Ukraine and the need to reduce dependency energy imports from Russia, the German government is pursuing partnerships with other potential suppliers. These include Qatar, the US and Senegal (Tagesschau, 2022). Such long-term partnerships not only risk a lock-in of the German economy into the unsustainable use of a fossil fuel, but also threatens the necessary transition in the partner countries and raises questions around international justice and geopolitical risks.

Nuclear

In April 2023, the last nuclear power plant was disconnected from the German grid. Due to the gas crisis, the end date was postponed from 31 December 2022 to 15 April 2023. The shutdown provides investment certainty for renewables and paves the way to a truly sustainable electricity system.

In 2024, one year after the last nuclear power plants were shut down, the feared impact on electricity prices proved unfounded. The remaining share of nuclear energy amounted to 3.6 % of electricity consumption in 2023 and came from imports from neighbouring countries such as France. Meanwhile, renewable energy like solar and wind, are progressively fulfilling the demand. (Agora Energiewende, 2024).

The industry sector in Germany emitted 155 MtCO₂e in 2023 and accounted for approximately one fifth of Germany’s total emissions (UBA, 2024d). Around 80% of the sector’s total emissions in 2023 came from steel, petrochemical, cement, and chemical production (Kędzierski, 2024). The sector's emissions declined rapidly in the 1990s. Since the 2000s, this decline slowed, with fluctuations mostly driven by economic factors rather than by climate policy.

Since 2022 and continuing through 2023, many industries have decreased production because of high energy prices, especially for fossil gas. As a result, emissions have fallen by approximately 15% since 2021 and have overachieved the sector’s emission reductions target for 2023 by 17 MtCO₂e.

Based on the UBA’s forecast, the sector is projected to continue emitting at a level below its annual emission targets until 2027. The UBA acknowledges that the current high energy prices have contributed to lower sectoral emissions and that the price level is likely temporary. The UBA projects that, starting in 2027, the industry sector will overshoot its yearly targets and, ultimately, exceed the climate change law’s 2030 sectoral target by 4 MtCO₂e.

The potential impact of improved energy efficiency measures and other structural changes that would reduce emissions in the long term is minimal (Expertenrat für Klimafragen, 2023). To achieve the 2030 target and get on a pathway towards climate neutrality, the industrial sector needs to reduce fossil energy consumption much faster and electrify processes at much greater speed (ibid).

As a reaction to the dual COVID and energy crises, governments of large economies, such as the US and China, have implemented programmes to improve the competitiveness of their domestic industries on the global market. Germany, where export industries are central to the economy, seems under pressure to follow suit, and has previously - and continues to - support its energy intensive industry though a range of exemptions and subsidies. State support for the sector includes exempting industry from the renewable energy levy, reducing the electricity tax rate, reserving free allocations in the EU ETS, and introducing “Carbon Contracts for Difference” (CCfDs) in 2024.

The EU ETS, which covers large industrial installations, showed new record CO₂ prices in 2023, breaching EUR 100t/CO₂ in February, 2023 (Twidale et al., 2023). However, prices have since collapsed: in February 2024, the price had fallen to approximately EUR 52/tCO₂ (Tamellini, 2024). In April, 2024, the ETS price hovered around EUR 70t/CO₂; a price level significantly lower than the official projections assume. Even with the previously high allowance prices, the effect of the additional costs for emissions-intensive processes was minor, as a substantial number of allowances for industry were still available for free. The number of free allowances is set to decrease over the next decade. The 2038 target for achieving net-zero under the EU ETS provides a strong signal for industry to decarbonise more rapidly.

In the short term, there is a risk that industrial players will not invest in low-carbon solutions, as these technologies are still new and relatively expensive, even if they already pay off in the long-term. To incentivise investments in low-carbon technologies, the government initiated the first round of bidding for CCfDs in March, 2024 (Moulson, 2024). CCfDs guarantee a certain fixed price for low-carbon industrial products and processes that are not yet price competitive. The programme aims at augmenting the uptake of low-carbon technologies in particularly energy-intensive industries, such as the chemical, steel, cement, paper and glass production industries (Kędzierski, 2024).

The CCfDs’ first round of bidding makes EUR 4bn available for innovative industrial projects that achieve a 60% emission reduction in three years and a 90% reduction in 15 years, relative to when employing conventional technologies. A second bidding round, worth EUR 19bn, is planned for the end of 2024 (BMWK, 2023b). In theory, this policy lowers the risk, therefore enabling industry to make significant investments in emerging low emission technologies that may substantially reduce the sector’s emissions. However, it remains unclear for how long the federal budget will be able to support such a high-cost intervention. The recent fluctuations in the EU ETS prices further complicate the potential for CCfDs to function as intended (Kędzierski, 2024).

Electrification is key to decarbonising the industry sector: a central challenge is the relatively high electricity price in Germany. To alleviate the financial burden of the high price, in November 2023, the government reduced the electricity tax for the industry sector, lowering it from 1.537ct/kWh to the EU’s minimum rate of 0.05ct/kWh (Bundesregierung, 2023). The government has guaranteed this reduced rate through 2025 and, depending on the federal budget, may extend the reduction through 2028.

Beyond moderating tax rates in the short term, the Ministry of Economy and Climate Change, in a 2023 working paper on electricity prices for energy-intensive installations, suggests using CCfDs and publicly-guaranteed power purchase agreements for industries with renewable energy producers to facilitate industry access to “cheap green electricity” in the long term (BMWK, 2023g).

The government's challenge is to ensure a stable economy in the short term, while transitioning to a zero-carbon industrial sector - in a just manner - in the long term. A robust regulatory framework that supports a long-term vision of transitioning and decarbonising the sector may alleviate bureaucratic challenges, and targeted efforts to address the shortage of skilled workers should be considered to complement subsidies.

In 2023, the transport sector was responsible for approximately 20% of Germany’s total emissions. According to the government’s targets, transport sector emissions need to be reduced by 44% below 1990 levels. This means that emissions need to fall to 85 MtCO₂e in 2030. Emissions were still at 146MtCO₂e in 2023 and 12 MtCO₂e above national target pathway for 2023. Transport emissions in 2030 are expected to overshoot the target by 26 MtCO₂e (UBA, 2024d).

Actions by the transport ministry

The Ministry of Transport has the ignored the government’s own environmental agency and its policy recommendations for reducing emissions in the transport sector (UBA, 2023c). Instead, the ministry weakened the climate law by removing the emergency programme protocol; previously, emergency policy packages needed to be submitted when a given sector overshot its emissions target. Over the past several years, the Ministry of Transport has generally obstructed more climate action than it has supported:

• It suddenly and prematurely eliminated purchase incentives for light and heavy-duty electric vehicles at the end of 2023 following federal budget cuts (BAFA, 2023).
• Germany delayed the adoption of the revised CO₂-standards for cars at the EU level and negotiated for the continued use ICE vehicles powered by CO₂-neutral e-fuels after 2035 (Packroff, 2023). Germany is lobbying for a similar exception under the new CO₂-standards for heavy-duty vehicles, which have yet to be adopted (Wacket and Abnett, 2024).
• The ministry negotiated favourable treatment of 144 freeway projects that will be accelerated.
• The individual commuter support was increased during the energy crisis, which incentivises longer travel distance between home and workplace and therefore more transport activity.
• The carbon price increase in the German ETS was temporarily suspended due to the energy crisis in 2022.
• The transport ministry objects to a speed limit for freeways. According to Federal Environment Agency research, a speed limit on highways of 130, 120 or 100 km/h would result in emissions savings of 1.5, 2 and 4.3 MtCO₂e/year, respectively, which is equal to 5-14% of emissions from passenger cars and light commercial vehicles on highways. It is important to note that Germany is one of the only countries in the world without freeway speed limits. (UBA, 2023d).

Recent policies that support emissions reductions include:

• Restructuring of the freeway fee for trucks according to CO₂ emissions of the vehicles. The revenue will be used to expand railway infrastructure.
• Introducing the “Germany ticket,” which costs EUR 49 per month and is valid on all forms of public transport and regional trains. Overall, the direct impact of the ticket on emissions in 2030 is limited.

Public transport

Support for public transport has somewhat increased, but the government is far from reaching its targets. The government plans to double the volume of rail passenger transport by 2030 compared to today’s level, increase the capacity and attractiveness of public transport, and raise the share of journeys undertaken by bicycle or on foot.

However, the government remains vague regarding specific instruments and necessary finance for achieving these goals (BMWK, 2022). In 2021, rail accounted for only 8% of total passenger transport, while cycling and walking make up only 6% (BMWK, 2022).

Deutsche Bahn, the national rail company, and the government further plan to invest EUR 86bn into the rail network by 2030. The income generated from the increase in the freeway fee for trucks will be used to cover half of these investments. The source for the remaining half is to be determined.

Germany introduced the “Germany ticket” in May 2023. The ticket, costing EUR 49 month, grants access to all means of local public transit, including regional trains, countrywide. By May 2024, approximately 11 million tickets had been issued. Estimates for the ticket’s short-term impact on emissions range from reductions of 4.2MtCO₂e/y to 22.6MtCO₂e/y by 2030 (Expertenrat für Klimafragen, 2024). The long-term impact may be more significant, given the single ticket system makes using public transport more accessible.

Electrification of road transport

Government policies do not appear to be sufficient to achieve the 2030 target of 15 million electric vehicles (Koska and Jansen, 2022). The most recent UBA emissions projection report notes that, given sectoral developments, the target of 15 million electric vehicles will not be achieved. The report assumes only 8 million electric vehicles will be registered in 2030. On 1 January 2024, only 1.4 million battery electric cars were registered in Germany. The share of newly-registered battery- and fuel cell-electric cars in 2023 was nearly 20% (EAFO, 2024).

Although the share of electric cars is increasing, both the existing vehicle fleet and new vehicle registrations remain dominated by internal combustion engine (ICE) vehicles. Research also suggests that the 15 million electric vehicle target is itself not sufficient to meet the sectoral emissions target for passenger transport set in the climate law (Koska and Jansen, 2022). To achieve the emissions target, at least 20 million electric vehicles need to be registered in 2030. Additional measures are needed to accelerate electric vehicle uptake, including the introduction of a registration tax for CO₂-intensive cars, a higher CO₂-price, or a comprehensive reform of company car taxation.

The government eliminated the purchase subsidy for electric cars at the end of 2023. Previously, the financial incentive for newly-purchased BEVs retailing at EUR 45,000 or less was worth up to EUR 6,750 (EUR 4,500 from the government and EUR 2,250 from manufacturers) (ADAC, 2023a). Although the eliminated subsidies have largely been absorbed by auto manufacturers and the German electric vehicle market is relatively mature, registrations of new electric vehicles have slowed since the government incentive’s termination: battery electric vehicles registrations were 14 percent lower in the first quarter of 2024 than in the same period in 2023 (KBA, 2024e); a worrisome outlook given that the German government anticipated new electric vehicle registrations to increase by nearly 40% in 2024 relative to 2023 (UBA, 2024a).

Charging infrastructure is expanding, with over 115,000 public charging points in place in November, 2023 (Bundesnetzagentur, 2024); an increase of over 80% since the end of 2021 (BMDV, 2024). The government plans to operationalise one million public charging points for electric vehicles by 2030 (BMDV, 2022).

The EU strengthened the CO₂ emissions performance standards in April 2023: by 2035, all new passenger cars must be zero emissions. The German government delayed the adoption of the new CO₂-standards by negotiating for an exception for e-fuels. This is problematic for several reasons: there are no cars that run exclusively on e-fuels, e-fuels will remain significantly more expensive in comparison to directly using electricity from batteries, and e-fuels are not zero emissions. Vehicles fuelled by e-fuels, as defined by EU’s Renewable Energy Directive methodology, are expected to use six times the electricity and emit 61 gCO₂e/km in 2035 (Transport & Environment, 2023). The focus on e-fuels therefore only prolongs the production of diesel and petrol cars and hinders the transition towards non-ICE-based vehicles. As the EU worked towards strengthening the CO₂ emission performance standards for heavy-duty vehicles in 2024, Germany again delayed the legislative process by lobbying for an exemption for e-fuels.

Carbon price in the German ETS

The German government's carbon price on transport fuels remains far too low to meet the target without other supportive measures. The fixed price was set at EUR 25/tCO₂ in 2021 and increased to EUR 30/tCO₂ in 2022. Price increases were suspended due to the energy crisis, but as of 2024 the price was raised to EUR 45/tCO₂e. From 2026, new allowances will be auctioned in a range of EUR 55 to EUR 65/tCO₂e (German Government, 2020a). In 2027, the German ETS will be merged into the revised EU ETS for transport and buildings.

The impact of the German ETS on GHG emissions in the transport sector is limited, as the carbon price of EUR 45/tCO₂e translates into a relatively small markup on the petrol price. By 2026, the price will increase to a maximum of EUR 65/tCO₂e (ICAP, 2022). Whether the price will change the investment behaviour of car owners depends on the price level and its predictability, which has been notably inconsistent in 2023 and 2024. The German Environmental Agency (UBA) estimates that, without any additional measures, an allowance price of at least EUR 350/tCO₂e would be necessary to reduce emissions to the sectoral target (Harthan and Repenning, 2022). The German government’s own projections report (UBA, 2024c) assumes an increase to EUR 125/tCO₂e after 2030 and reaching a maximum of EUR 180/tCO₂e in 2050.

All proceeds from the ETS system will be re-invested into climate protection or returned to citizens. In 2022, the combined revenues of the German ETS and the EU ETS totalled more than EUR 13bn and were channelled into the country’s Climate and Transformation Fund (KTF), which functions as the principal source of climate finance economy-wide (UBA, 2023a). Although the government has agreed to return the revenues of the carbon price to consumers, this payback will likely only happen beginning in 2028. Administrative barriers are one issue, while the fact that the revenues are already planned for other purposes through the KTF is another (Pokraka, 2023).

The buildings sector in Germany emitted 102 MtCO₂e in 2023, about 15% of Germany’s total emissions. Emissions for 2023 reached a new record low, driven by gas-saving efforts following the suspension of imports from Russia and relatively mild temperatures, and were in line with the sectoral target.

Over the years, emissions from this sector have declined, but this has slowed in the last decade. By 2030, the climate change law foresees a limit of 67 MtCO₂e for buildings, which the UBA forecasts will be slightly exceeded by 1 MtCO₂e (UBA, 2024c).

A Climate Action Tracker report stresses the importance of a comprehensive approach to increasing efficiency and speeding up decarbonisation, particularly in the buildings sector (Climate Action Tracker, 2022).

The government coalition agreed on a 65% renewable requirement for new heating systems from 2024, and producing 50% of all heat in a GHG-neutral manner by 2030, which would speed up the decarbonisation of the sector. By 2045, all heating systems would need to fully run on GHG-neutral energy (Federal Ministry of Economics and Climate Protection (BMWK), 2023).

A draft law to implement this principle for new heating systems received significant opposition. Subsequently, the government released a watered-down version, which delayed the start of implementation for some regions from 2024 to 2028, and introduced more exceptions and relaxed the use of wood heating.

The legislative process for this version faced initial delays due to procedural questions raised by the federal court. Eventually, the law was passed in September 2023. While the proposed law did not specify particular technologies, it effectively aimed to promote the adoption of heat pumps, replacing traditional gas and oil boilers. The law did include some exceptions.

While the law's provision for new buildings in new residential areas to meet a 65% renewable energy target for heating systems by 2024 seems like a positive step towards decarbonisation, the option for owners of existing buildings to delay compliance until a municipal heating plan is available raises concerns. This delay could potentially slow down the transition to renewable heating systems, allowing more new fossil fuel-based systems to be installed.

The law mandates that municipal heat planning should be completed nationwide by mid-2028. After this point, it will generally not be permissible for heating systems in both new and existing buildings to exclusively rely on fossil fuels for heating systems. Financial support programmes offering up to 70% assistance for transitioning to renewable heating systems are also available (Bundesamt für Wirtschaft und Ausfuhrkontrolle, 2024).

In November 2023, the Bundestag passed the Heat Planning and Decarbonisation of Heating Networks Act, which came into effect in 2024. The legislation requires federal states to develop heating plans for municipalities within their jurisdiction to achieve a greenhouse gas-neutral heat supply by 2045.

Plans must be implemented by 2026 for municipalities with populations exceeding 100,000, and by 2028 for those with populations below 100,000. These plans are intended to encourage sustainable and climate-neutral heating solutions. By 2030, half of grid-based heat production is expected to be climate-neutral, and by 2040, 80% of heat is aimed to be sourced from renewable energy or waste heat. (BMWSB, 2023).

The recent approval of the EU Building Directive compromise is a positive step, yet the goals for reducing energy consumption could be more ambitious. The directive aims for an average reduction of 16% by 2030 and 20-22% by 2035. However, it falls short of the originally proposed stringent standards; notable is the absence of mandatory renovation requirements (Tagesschau, 2024a). Another concern is the approach to green hydrogen, which the law seems to assume will be available for the buildings sector. Green hydrogen is a very expensive source of energy, meaning its use should be limited to applications without alternatives (NewClimate Institute, 2023). A clear direction for this energy source in the law would provide more certainty to the planning communities and the industry providing the required expertise and technologies.

Germany’s national emissions trading scheme “Brennstoffemissionshandelsgesetz – BEHG” covers all non-ETS sectors, incl. the buildings sector. Companies selling fossil fuels have to purchase certificates for the carbon content of those fuels, and pass on the additional financial burden to the end consumers through an increased price. The scheme started in 2021 with an initial price of EUR 25 per tonne of CO₂. It was meant to increase annually, but in 2022 the government postponed the increase because of the high energy prices driven by the illegal invasion of Russia in Ukraine. As of 2024, it is raised to EUR 45 per tonne of CO₂.

An increasing carbon price will mean that running fossil-based heating systems will cost more over time. This trend is foreseeable to informed building owners, but it can be assumed that most owners will lack knowledge and opt for a system with lower investment costs and a technology they are familiar with, unless they are required to deviate from this by law. In the absence of a clear ban of new fossil heating systems, there is a risk that high prices for fuel will burden many house owners and tenants in the future.

The agricultural sector in Germany emitted 59 MtCO₂e in 2023, about 8% of Germany’s total emissions. Over the last two decades, emissions in the sector slightly declined, but at a slower rate than most other sectors. The largest source, with about half of the sector’s emissions, is methane released through enteric fermentation of livestock, followed by nitrous oxide emissions from agricultural lands.

In 2023, emissions from the agricultural sector remained below the sectoral limit set by the climate change law. For 2030, the climate change law foresees a limit of 57 MtCO₂e/yr for agriculture, which the UBA forecasts will be almost met with implemented measures (UBA, 2024c).

Emissions in the agriculture sector need to reduce significantly so that Germany can reach climate neutrality by 2045. So far, policies are not in place and agreement with farmers is urgently needed, as they recently have been a stumbling block to new policies.

Meat consumption in 2023 decreased by 4% relative to 2022, which was also reflected in reduced production (BMEL, 2024). The level of meat consumption is still clearly above world average and beyond a level that constitutes a healthy diet (Climate Action Tracker, 2018). While demand for meat products is down, plant-based products saw an increasingly strong pick up by German citizens in 2023. Another factor for decreased meat consumption in recent years might be increased food prices as a result of the energy crisis.

To decrease the burden of inflation on poorer households and steer nutrition in a healthier and more environmentally sustainable direction, the German Minister for Agriculture proposed waiving the value added tax on plant-based products in early 2023. At the moment, all food products, including meat and dairy products, are taxed at a reduced rate of 7% (as opposed to 19% for other goods and drinks). This measure would need to be implemented by the Ministry of Finance, who has not yet picked up this proposal.

In 1990 the German waste sector emitted 38 MtCO₂e (3% of total emissions). By 2021, emissions were at just 4 MtCO₂e - a decrease of 89% and contributing only about 1% of total emissions (UBA, 2023b). This reduction was mainly achieved by ending the disposal of untreated residential waste and the increased utilisation of energy and materials from waste (Umweltbundesamt, 2017). Since 2005, landfilling of biodegradable waste has been prohibited in Germany. From 2024, CO₂ emissions from waste incineration are part of the emissions trading scheme for fuels (BEHG).