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New German government expected to turn greener despite coalition uncertainty

30 September 2021 Max Tingyao Lin

Policy experts expect the next German government to show more ambition on the environmental front despite uncertainty surrounding coalition politics in the wake of the federal parliamentary election on 26 September.

The Green Party has a strong chance of being part of a ruling coalition for the first time since 2005, having posted its best election results ever based on the provisional vote count.

"This election is good news for the climate compared to the previous government," nonprofit NewClimate Institute Founding Partner Niklas Höhne told Net-Zero Business Daily. "Having the Greens as part of a potential new coalition would boost climate policy in Germany."

The Social Democratic Party (SPD) won 206 of the Bundestag's 735 seats and became the largest party, followed by the Christian Democratic Union-Christian Social Union (CDU/CSU) bloc, which took 196 seats in its worst-ever showing, the preliminary results show.

The Greens won 118 seats, the Free Democratic Party (FDP) 92 seats, the Alternative for Germany 83 seats, the Left 39 seats, and the South Schleswig Voters' Association one seat.

In the post-election arithmetic, two potential coalitions enjoy a clear majority: one formed by the SPD, the Greens and the FDP, or one by the CDU/CSU and the same two smaller parties.

A grand coalition between the SDP and the CDU/CSU can mathematically return to form another government as they hold a ruling majority by themselves, but observers believe this fallback option is highly unlikely.

Such a coalition has governed Germany for 12 of the past 16 years, and the parties are showing little appetite for working together again.

"Both other options [the SPD/Greens/FDP and CDU/CSU/Greens/FDP coalitions] will be more ambitious than the current government," Höhne said.

The Social Democrats will have higher ambitions compared with the CDU/CSU, with Olaf Scholz, the SPD's candidate for chancellor and the current finance minister, playing up his climate credentials during the campaign, he added.

"In both cases it will be a mix of different policies counting on market forces and regulation," Höhne said. "With the SPD, it will be a bit more ambitious, leaning more towards regulation and with more social compensation compared to a potential coalition led by CDU."

Missed opportunities

Following some hot summers and floods in western states in July, climate policy was front-and-center during the election campaign.

IHS Markit Principal Economist Timo Klein said the next government's economic policies will be more ambitious "simply because the acceleration of negative effects from climate change have become so much more apparent in recent years."

"There is a shared sense among most parties that the last few Merkel years have meant too much standstill in terms of structural transformation," said Klein, citing a lack of progress in expediting the low-carbon transformation of Germany's energy supply and automotive sector, digitalizing the public sector, and modernizing rail and road transportation.

In her 16-year reign, outgoing Chancellor Angela Merkel was praised by some for her diplomatic efforts in climate summits and behind the Paris Agreement.

But Berlin-based think tank Agora Energiewende estimated Germany's GHG emissions would grow by 47 million metric tons (mt) to 786 million mt this year, or 37% below the 1990 level, as economic activity recovers following the COVID-19 pandemic. The country had targeted a 40% reduction from 2020 onwards.

"In the election year of 2021, Germany will record the highest increase in GHG emissions since 1990," said Patrick Graichen, director of Agora Energiewende. "With an immediate program, the next government must set the course for climate neutrality in the first 100 days."

In the business community, the BDEW Federal Association of Energy and Water Management also called on the new government to accelerate the energy transition.

"We need a coalition for climate protection and the energy transition as soon as possible. Regardless of which coalition it will be in the end, every new government must act quickly," said Kerstin Andreae, chairwoman of the largest trade group representing energy firms in Germany.

"A new federal government must clear the way for the accelerated expansion of renewable energies and the expansion and reconstruction of the energy networks. At the same time, it will have to deal with the issue of energy prices," she added in a statement 27 September.

"In the last legislative period, many energy policy laws were literally chased through the parliamentary procedure without the industries concerned being able to comment on legislative proposals that directly affect them within a reasonable period of time," she added.

Climate ambition

Germany now has some of the most aggressive decarbonization targets among major economies after its parliament amended the Climate Action Law in June.

The world's seventh-largest GHG emitter has now set binding targets to reduce emissions by 65% before 2030 and 88% before 2040, using a 1990 baseline. It aims to reach carbon neutrality by 2045, compared with the previous target of 2050.

These are more ambitious than the EU-wide targets of cutting emissions by 55% before 2030 and achieving climate neutrality by the mid-century point. Berlin has largely welcomed the European Commission's proposed "Fit for 55" package of policies designed to reach the goals.

The German government has also committed to raising the share of renewable energy in the country's power mix from 43% currently to 65% by 2030. According to Fitch Ratings, Europe's largest economy plans to increase solar photovoltaic capacity to 100 GW by 2030 from 47 GW in October 2020, onshore wind to 71 GW from 53 GW, offshore wind to 20 GW from 6.7 GW, and biomass to 8.4 GW from 8.3 GW.

Germany has pledged €8 billion ($9.73 billion) in government funding for 62 hydrogen projects, though Brussels will need approve them as Important Projects of Common European Interest to sidestep EU regulations for state aid.

In general, the parties in the coalition talks agree on carbon neutrality and want to expand renewable power and the use of hydrogen. But they differ on the timelines and the means to achieving those targets, according to an analysis of their manifestos by think tank E3G.

The Greens want to reach net-zero emissions in 2040, while the SDP and the CDU/CSU are comfortable with the current 2045 target. The FDP sets a neutrality deadline of 2050.

Germany is currently aiming to phase out coal-fired power generation by 2038, but the Greens want to advance the date to 2030 and could make this a condition for joining any government. The SDP and the CDU/CSU are both keeping to the existing target, but the former is more likely to compromise. The FDP is not keen on banning coal plants outright.

Separately, the Greens want renewable power to account for 100% of the generation stack by 2035 while the SDP is aiming for 2040. The FDP and the CDP/CSU have refrained from setting firm dates.

Long talks ahead

Many observers expect the parties to spend weeks, or even months, bridging their differences.

"The political debate will rage around the means used to achieve those goals, and the degree to which the public or the private sector should be the driving force," IHS Markit's Klein said.

"Although the FDP and Greens aren't that far apart in terms of their goals in this area, they differ a lot with respect to the means. The FDP emphasizes market signals and the need for accelerated depreciation of private sector investment projects, while the Greens see a much larger role for the government, either via regulation or the tax system," he added.

"Once they have agreed [to terms], the addition of the third partner will trigger another round of negotiations, with the SPD being particularly keen to protect people with small incomes from the detrimental effects of changes in climate and energy policy," Klein said.

DIW Econ, the consulting arm of the German Institute for Economic Research, concluded in a study that all the main parties failed to unveil sufficient policy measures for the 2030 emissions target. The Greens received the highest score for their election program, followed by the SPD and the CDU/CSU, while the FDP scored the lowest.

"We therefore expect difficult negotiations. The parties cannot meet in the middle, as is usually the case, because this would definitely miss the climate targets," said Michael Schroeren, a spokesman for the Climate Neutrality Foundation, which commissioned the study.

Agora Energiewende Senior Associate Frank Steffe added that the new government would need to play catch-up, as the outgoing coalition failed to provide new policy incentives when raising the emissions reduction targets.

"This cannot work. New targets need to have new measures. This is the main gap in the current policy," he said.

"We need strong measures in every sector, including energy, mobility, building, industry, and agriculture. This is difficult for [whichever of] the three parties that will have to build a new coalition," he added.

Posted 30 September 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability


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