A worker oversees molten iron undergoing purification and alloying to become steel
Switching cost: renewables pose a challenge for energy-hungry industries such as steel © Lukas Schulze/Getty Images

If Europe is ever to reach its climate targets, the road to doing so will lie through Germany.

The country is both the EU’s largest economy and its largest emitter of greenhouse gases (GHGs). So realising the bloc’s ambition to reach net zero GHG emissions by 2050 will depend greatly on German progress.

And the latest Europe’s Climate Leaders list, compiled by the FT and data provider Statista, suggests that, at a corporate level at least, Germany is making advances.

Of the just over 400 companies on the list — comprising businesses that have significantly cut their core GHG emissions relative to revenue — 52 are from Germany.

That is second only to the (now non-EU) UK, which arguably owes its position to a legislative head start in the 2000s, as well as bias towards businesses in the carbon-light financial services industry.

Germany, furthermore, has its work cut out because its strength is built on manufacturing and exports to a greater degree than other big European economies. GHG reductions, therefore, are tricky.

“Given our industrial structure with less services and more focus on exporting technologies, it’s harder for German industry,” says Wilfried Rickels, research director for global commons and climate policy at the Kiel Institute for the World Economy, an economics think-tank.

The Federation of German Industries, the BDI, is clear about the challenge that lies ahead. In its 2021 Climate Paths 2.0 report, it says meeting GHG targets will require Germany to “undertake the greatest transformation in its postwar history”.

GHG reductions are required by the Federal Climate Change Act (the KSG), which came into force three years after the Paris Agreement was ratified unanimously by Germany’s Parliament in 2016.

The act set a GHG emissions reduction target of 55 per cent by 2030 compared with 1990.

However, Germany’s highest court ruled in early 2021 that this was not ambitious enough. In response to a case brought by climate activists, the court concluded that the KSG “irreversibly postpones high emission reduction burdens to periods after 2030, to the detriment of the younger generation”. In August that year, chancellor Angela Merkel’s outgoing government updated the KSG to require a 65 per cent GHG reduction by 2030 and net zero by 2045.

The KSG sets annual reduction targets for the period up to 2030, specifying emission levels for sectors such as energy, industry and transport. Not every sector is rising to the challenge, though. The industrial sector is projected to be a cumulative 178mn tonnes of CO2 over its target by 2030.

But domestic legislation is only part of the picture. Many experts think that the most useful mechanism for getting German businesses to cut emissions is the EU’s Emissions Trading System (ETS). This “cap and trade” scheme, set up in 2005, sets a maximum amount of GHG emissions that a company can produce and imposes fines for each excess tonne.

When carbon prices are high enough, the ETS incentivises businesses to eliminate emissions. EU carbon prices have surged since 2017 and, in 2021, Germany made a record €5.3bn in revenue by auctioning emission allowances — money that goes back into financing the energy transition and reducing the burden on consumers.

To many, the path to that transition is clear. “Renewable energy is key,” says Thilo Schäfer, research director for environment, energy and infrastructure at the German Economic Institute.

Although this transition may seem easier for high-tech manufacturers than for heavy industry, Schäfer thinks this will change with time: “If we have more [green energy], then we can use it to make green hydrogen or other synthetic fuels.” Such fuels will keep heavy industry running with far lower GHG emissions.

But getting enough renewable energy to power Europe’s largest exporter sustainably and catch up with targets is a “mammoth task” that “will take years to see its success”, warns Robert Habeck, Germany’s minister for economic affairs and climate action.

The country plans to rely on coal until 2030 at the earliest, and has said it will close its remaining nuclear power plants — which, though controversial, do not emit GHGs — by the end of this year. At the same time, Russia’s invasion of Ukraine has raised questions about Germany’s dependence on Russian gas imports.

Wind turbines stand next to a power plant emitting large plumes of smoke
Power plan: Germany plans to continue to rely on coal energy until 2030, but is also incentivising use of renewables © Sacha Steinbach/EPA-EFE/Shutterstock

Some argue that the war will catalyse change. Patrick Graichen, state secretary in Habeck’s ministry, said in March that “the core technologies to become independent of Putin and to drive forward climate protection are the same”. Germany’s finance minister, Christian Lindner, has even branded renewables “freedom energy”.

Meanwhile, the new “superministry” that Habeck heads — a product of the coalition negotiations to form chancellor Olaf Scholz’s government — plans to incentivise companies to invest in renewables with subsidies and other financial mechanisms.

“The direction of politics is pretty clear,” says Schäfer. “Carbon pricing and due diligence is part of it, too.

“These are huge incentives for companies to gain an advantage by saying they already undertook this step and reduced emissions before they were forced to do it.”

Climate Capital

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