By Julia Wanjiru Nikiema, OECD environmental policy analyst
“Not enough, too slow, too late. Welcome to my world!” With these words, Vice Chancellor Robert Habeck reflected on Germany’s current climate policy at the launch of the 2023 OECD Environmental Performance Review of Germany and the OECD Economic Survey of Germany in Berlin in May 2023. He deplored the many obstacles the country faces as it tries to accelerate its climate action.
Germany has ambitious climate goals. It aims to be climate neutral in 2045 and achieve negative greenhouse gas emissions after 2050. By 2020, the country had managed to reduce its emissions by 41.3% compared to 1990 levels (or 729 Mt CO2-eq), meeting its 40% reduction target. This is better than many other industrialised countries. Moreover, the government launched a new EUR 4 billion Federal Action Plan on Nature-based Solutions for Climate and Biodiversity (Aktionsprogramm Natürlicher Klimaschutz), which could become a game changer and contribute massively to enhancing natural climate protection. Nevertheless, despite progress, Germany is still among the ten largest GHG emitters in the world.
The government has pledged to take Germany’s climate action to a new level. However, finding political consensus has proven to be difficult despite a very detailed coalition treaty promising to “Dare More Progress”. The controversial debate surrounding a new heating law is one of the most recent examples.
The OECD Environmental Performance Review confirms a growing gap between policy ambition and action. It recommends Germany to further accelerate climate action, particularly in the buildings and transport sectors.
How could Germany accelerate its climate action?
More carrot, less stick to decarbonise the heating sector
This summer’s debate on climate-friendly heating systems shows how difficult it can be to advance societal change that affects the lives of millions of people. Germany is in a tricky situation as it needs to catch up on a late start to achieve its climate goals in the buildings sector. More than 80% of Germany’s heating requirements still rely on fossil fuels, representing about one third of Germany’s total final energy consumption, a big challenge.
The new heating law intends to accelerate the switch to climate-friendly alternatives. As of 2024, only heating systems that run on at least 65% renewable energy can be newly installed. Nobody will be obliged to change a functional fossil fuel-run heating system until 2045. However, the draft measures provoked vigorous public debate and were eventually softened, with exemptions, longer transition periods and options to ensure technological neutrality. Government support shall now cover up to 70% of investment costs depending on household income. Despite these changes, the revised draft law has been blocked by the Federal Constitutional Court arguing that more time was needed to deliberate on the bill. It was eventually approved by the Bundestag in early September 2023.
This example illustrates that “Wanting to move faster” is not enough if the enabling environment has not been created and social implications have not been taken into careful account. The fierce debate created a lot of uncertainty. Demand for heat pumps slumped; the installation of new fossil fuel-run heating systems boomed despite a scheduled carbon price increase in the heating sector.
Stronger incentives (carrots) could reassure and help convince homeowners to make smarter, future-oriented investment choices to decarbonise heat in homes. Bottom-up support from German citizens would certainly help accelerate the heat transition. To do so, clear long-term policy orientations with appropriate price signals are essential. However, existing support measures have been rather confusing and even contradictory. The federal government still subsidised the installation of new gas heating systems until August 2022. At the same time, support for heat pumps was cut by about 10%. Germany has a long way to go to reach its goal of installing 500 000 new heat pumps per year from 2024.
Other countries have started preparing their transition to low-carbon building heating systems more than a decade ago. For example, Denmark banned the installation of oil-fired boilers and natural gas heating in new buildings in 2013. To date, over two-thirds of Danish households are connected to district heating. In 2020, Norway became the first country to introduce a ban on fossil fuel heating in all buildings, illustrating that these societal changes are possible. Therefore, Germany’s decision to accelerate municipal heating planning is a welcome step towards creating the prerequisites for enabling citizens to make informed investment decisions.
Pick the low-hanging fruit in the transport sector
Transport accounted for 19% of Germany’s GHG emissions in 2021 and has been the slowest sector to cut emissions. Many opportunities such as broader use of speed limits, tolls for passenger and light duty vehicles, as well as congestion charges in urban areas have not been taken; others, such as, increased parking fees, are slowly materialising. A nationwide survey conducted in 2021 showed that 60% of Germans supported a general speed limit of 130 km/h on German federal motorways. According to estimates of the German Environment Agency, this would save about 1.9 Mt CO2-eq per year. However, a general speed limit is not on the table for discussion within this legislative period (2021-25) while other environmentally counterproductive, costly measures such as the company car privilege or the commuter allowance have been maintained (Figure 1). Both subsidies, in place for over a decade, should be replaced by more targeted support for people in need, privileging public transport.
The independent Council of Experts on Climate Change concluded in its 2023 Verification Report that the government’s climate measures in the transport sector are again “insufficient” while also flagging financial gaps. Rather than reinforcing actions to put the transport sector back on track, government parties agreed to soften annual sectoral emissions targets. However, sector-specific climate action also contributes to much-needed transformative change with broader environmental benefits. For example, the tightening of low emission zones in urban areas would have significant co-benefits for human health. Bold action is needed to address car dependency and promote green mobility with an integrated strategy.
Send clearer price signals to support the transition to net zero
High fossil fuel support jeopardises climate goals. In total, environmentally harmful subsidies and tax expenditures amounted to 1.9% of GDP. This compares to only 1% of GDP in government support for green investment by households and firms in 2023. This situation provides mixed signals, which impact investment decisions and consumption behaviour because the balance is still tilted in favour of fossil fuels.
Subsidies with negative effects on the environment have been growing over the past decade. They were estimated at EUR 65 billion in 2018 compared to EUR 48 billion in 2008. As already highlighted in the 2012 OECD Environmental Performance Review of the country, many long-term subsidies (e.g. diesel discount) are no longer justified on economic or social grounds and should be phased out.
Support for fossil fuels and generous tax exemptions jeopardise climate goals
Estimated annual costs in 2018, in EUR billion
The OECD review recommends following through on the federal government’s intention to systematically screen existing and proposed subsidies to identify economic, environmental and social inefficiencies, and design alternative policies to achieve the same objectives in line with climate and environmental goals. Additional revenues and savings could be used to advance Germany’s transition to net zero.
Dare more progress
The OECD review commends Germany for its swift response to the global energy crisis. The country has taken a series of measures, which are historic in size and scope. They are set to accelerate massively its green energy transition in the coming years. These include legislation and funding programmes targeting the switch away from fossil fuels with an ambitious roll-out of renewable energy and the faster coal phase-out in the state of North Rhine-Westphalia by 2030, eight years earlier than initially scheduled. Prior to the crisis, who would have thought that this could be possible? The acute threat created pressure to unite and act quickly. A similar push is needed to “Dare More Progress” and advance ambitious climate action at a much faster pace across all sectors.