At the start of 2024, Germany is far from the calm and steady state often claimed by Chancellor Olaf Scholz – with far-right party protests, farmers' demonstrations and a persistent lack of economic growth. However, even while in “stormy waters”, the indicators reached at the end of 2023 could be considered a notable success: Renewable energy covered half of the country's electricity demand for the first time, and grid expansion accelerated due to faster permitting procedures. There was no need to fear gas shortages during the winter. Nevertheless, over the coming years, as the energy transition and climate change require heavy investment, the government is facing a budget shortfall – some reasons are beyond its control, some are self-inflicted...
Events expected in the coming weeks
Disputes, disagreements and squabbles
Cooperation between partners in the German government coalition does not seem to be running smoothly, as reports continue to emerge regarding the poor state of the national economy. After weeks of bickering over how to fill the missing funding in this year's federal budget and about important transition programmes – with the prospect that negotiations will be even more difficult in 2025 – the ruling SPD, Greens and FDP face new disputes: Economy Minister Robert Habeck (Robert Habeck) proposed changes that would allow an increase in public debt to create a special fund to facilitate business. This idea was quickly rejected by Finance Minister Christian Lindner (FDP – Free Democrats). Now, both are trying to find common ground on a potential corporate tax reform. Furthermore, Germany may have to abstain from the EU vote on the Corporate Sustainability Due Diligence Directive (CSDDD). The vote has been postponed for the time being. In the final act, the government voted “in favour” regarding truck emission limits after the FDP questioned deals that the government had previously agreed to at the EU level. This was followed by unusually broad criticism from several Green party ministers, who believe the government's credibility is at stake.
Elections are approaching.
Disagreements in the three-party coalition are nothing new (remember Germany's heating law…), and they are surfacing at a time when concerns over the further rise in influence of the far-right, anti-climate change Alternative for Germany (AfD) party in opinion polls are threatening every government decision that might cause controversy ahead of the upcoming EU elections in June. It will be even more important for the three regional elections scheduled for September in East Germany. It does not help that the coalition is backing away from the so-called Klimageld. The climate premium is intended as a per-capita payment using revenue from emissions trading to compensate for rising CO₂ prices, especially for lower-income households. The drop in the polls for the AfD provides a slight reprieve at this time. This was triggered by a story from Correctiv journalists about party officials meeting with neo-Nazis, which led to hundreds of thousands of citizens protesting across the country.
Who is responsible for failing to meet the target?
Parliament is still negotiating the climate law reform, and it is unclear when the talks will conclude so that a final vote can be held in the Bundestag. In an interview with the newspaper “Welt am Sonntag”, Finance Minister Lindner recently said that a climate law that “overcomes the constraints of a planned economy” is part of the aforementioned reform package. This is now highly necessary for German companies and could indicate that the reform of climate legislation has become a major argument in these debates. The proposed reform would effectively weaken ministerial responsibility for excessive emissions and focus on emission reduction efforts. The rationale is the projection of future emissions across the entire economy.
Poland in the spotlight
In mid-February, the focus will be on Polish-German relations. On 12 February, Chancellor Scholz will host Prime Minister Donald Tusk in Berlin for his first official visit since taking office. The two will discuss bilateral and European issues, with particular attention to security and economic policy. On 13 February, Economy Minister Robert Habeck will travel to Warsaw, where he will meet with several ministers of the new government.
Following the European Commission's proposal on an industrial carbon management strategy, submitted alongside a recommendation for the bloc's 2040 climate target, the German government now has the opportunity to make final changes to its planned carbon capture, storage and utilisation strategy. When will it be published? As is known, it will take at least a couple more weeks.
A waiting game?
Also still under development are the national hydrogen import strategy, the national circular economy strategy (with a comprehensive stakeholder process) and the next energy transition monitoring report. Monitoring in 2024 will continue to focus on the opinion of the country's independent Expert Commission on the Energy Transition, but it will no longer include a government report. The opinion is expected in March.
Is it worth the wait?
Almost a year after the announcement, Chancellor Scholz, Finance Minister Lindner and Economy Minister Habeck presented Germany's new strategy for power plants. They outlined the key elements and announced that Germany would hold auctions to support the construction of 10 GW of gas power plants (less than originally planned), which will be converted to hydrogen power plants between 2035 and 2040. The government did not provide details on the level of support or the auction schedule. However, two developments are particularly noteworthy: first, the coalition agreed to introduce a capacity mechanism to ensure the viability of power plants, which the government considers essential to guarantee security of electricity supply as the share of volatile renewables increases and coal is phased out. An assessment of the possibility of ending coal use earlier – by 2030, instead of 2038 as provided for in the current law – is part of the set of deferred government strategies and reports. Secondly, the question: will the government support carbon capture and storage solutions for gas power plants? This issue will be addressed in the upcoming carbon management strategy.
The next year could be even more difficult – at least regarding closing the government's budget gap. After difficult negotiations, during which billions of euros in spending on various projects were cut, funds were reallocated and additional revenue was generated, parliament passed the 2024 budget. However, the coalition faces even hotter debates, as it faces a significantly larger budget deficit in 2025. Several NGOs and the industry union IG BCE have called on the government to make significant changes to public funding (i.e. to reform the debt “brake”) in order to boost the transition to climate neutrality through greater investment.
Tractors, tractors everywhere
Farmers across Germany voiced their opinions in protests that lasted for weeks around the turn of the year, when the government announced that it would reduce tax relief on diesel in an effort to fill the budget gap. Farmers throughout Europe have been protesting against policies, including climate measures. This comes at a time when extreme weather caused by climate change is increasingly affecting production. It is clear that the protests in Germany are linked to climate policy, drawing attention to the difficult task of reconciling decarbonisation measures with budget constraints and social cohesion.
More on climate-friendly issues
Renewables will cover more than half of Germany's electricity demand in 2023. Both a decline in total electricity consumption and an increase in the absolute volume of renewable production, which rose by six percent to an all-time high of 267 TWh, boosted the share of renewable electricity to nearly 52%. At the same time, preliminary data indicate that emissions fell by about ten percent in 2023, reaching their lowest level in 70 years. This trend is linked to a reduction in the use of coal power and economic weakness.
The European Commission has recommended that the bloc reduce net greenhouse gas emissions by 90 percent by 2040, noting that the EU Green Deal must now become an “industrial decarbonisation deal”. Politicians from member states such as Poland and Germany welcomed the proposal as a step towards ensuring a competitive European economy while striving for climate neutrality. They warned that this is the beginning of a debate, not a final decision. Industry associations, such as the Federation of German Industries (BDI), called the target “very ambitious”. Environmental NGOs, meanwhile, criticised the proposal for its lack of ambition and for the target of phasing out fossil fuels. This is the first recommendation with which the outgoing Commission is starting discussions. The final decision will be taken by European Union institutions next year – already in the new legislature after the 2024 elections.