Transitioning to net-zero carbon – Germany’s challenges and opportunities

“Tackling Climate Change” – a Virtual World Tour ahead of COP26: Germany - Part 2.

However, in the past 12 months, with the historic court ruling which demanded that the government accelerate its journey to net zero and with all four political parties currently in coalition talks post the federal election on 26th September proclaiming that climate and energy policies are featuring heavily in the discussions about who will form the new government, all signs point to a strong revitalisation of the country’s environmental ambitions.

In this second article about Germany, we look in more detail at specific green challenges and opportunities of the world’s third largest exporting nation[1]. We see the following:

Heat waves, coal dependency and COVID-19 - Germany’s diverse mix of challenges

Challenge 1: Germany ranks amongst most climate change affected countries

In 2018, Germany, Japan and the Philippines were top of the list of the annually published Global Climate Risk Index, which analyses to what extent countries have been affected by the impact of weather-related loss events such as storms, floods or heat waves[2].

Between April and July 2018, Germany experienced the hottest year since records began, with temperatures 2.9°C above average. In the same year, after heavy rainfalls in January, only 61% of the usual amount of rain fell during the summer, resulting in 70% of the soil being affected by drought that led to a dramatic decline in harvest. The country’s 10,000 farms faced a total of €680 million in damage while only being compensated for half of their losses through a €340 million pot in state aid[3].

The most devastating reminder of the country’s vulnerability to climate change were the catastrophic floods in Rhineland-Palatinate and North Rhine-Westphalia in June this year, during which more than 180 people died and many more were injured. The resulting insured damage is estimated to reach €7 billion, however, the overall damage will be much higher as many buildings weren't insured for “elementary damage” from events such as floods[4]. The German government has agreed to provide €30 billion to help rebuild those regions[5]. 

2018, and now 2021, weren’t isolated events: over the past two decades, Germany has been among the 20 most climate change affected countries; mainly due to repeated heat waves, storms and floods in the Danube and Elbe rivers[6]. And, when the winter of 2019/2020 turned out to be the country’s second warmest since records began in 1881, the German meteorological office issued a warning that “seasons that deviate considerably from the norm are becoming more and more frequent. Global warming has at least intensified this trend.”[7]

Apart from severe domestic impacts, the authors of a research report by the ‘Umweltbundesamt’, the German Environment Agency, urged the private sector to also consider that the international impacts of global climate change can be particularly relevant for countries with a high level of globalisation in its national economy, such as Germany. “The effects of climate change through foreign trade alone are at least as significant as the economic consequences of climate change within national borders”[8], the report concluded.

Challenge 2: Persisting coal dependency comes at a price

With climate change already impacting Germany considerably, the German government was determined to achieve its 40% greenhouse gas (GHG) emissions reduction target in 2020 (compared to 1990 emission levels)[9]. However, the country’s continued dependence on coal proved – not surprisingly – to be one of the main obstacles in reaching this target.

Chancellor Angela Merkel, once praised as the “climate chancellor” for pushing ahead with an energy transition towards clean renewables, has equally been harshly criticised for the country’s persisting reliance on coal for power production – a habit, it turns out, is hard to kick.

Today, coal is still used to generate about one-third of Germany’s electricity – while the UK celebrated its first 24-hour period without coal power since the Industrial Revolution on April 21, 2017[10]. The share of brown coal (lignite) in the German electricity mix has remained stable for two decades. While the country is the world’s biggest lignite producer it’s also its biggest consumer within the EU, taking 44% of the total EU consumption in 2017, followed by Poland (16%), the Czech Republic and Greece (both 10%)[11].

However, there’s progress: The share of lignite in the electricity mix fell from just under 20% in 2019 to 16.8% in 2020, while electricity production from hard coal also fell sharply, 22%, to 7.3% in 2020. Nevertheless, lignite still remains the second most important energy source for the country with critics pointing to the German government’s controversial plans in 2007 to open new coal power plants despite its commitment to curbing carbon emissions[12]. The growing share of renewable energy in the national electricity market finally led to the government discarding its strategy of expanding coal power capacity and instead agreeing to a plan to phase out coal-fired power stations by 2038 latest, ideally by 2035.

Having waited this long to wean itself off coal and exacerbating, as well as prolonging, the dependency by promoting the build of new power plants until fairly recently – in part to offset the phase-out of nuclear power by 2022 that Merkel decided after Japan’s 2011 Fukushima catastrophe – now comes with a high price: €40billion compensation will be paid to four German states, Saxony-Anhalt, Saxony, North Rhine-Westphalia and Brandenburg, which all have lignite mines and coal-fired power plants, to finance new infrastructure projects and retrain workers for new jobs, while mines and utilities will also get compensation for their lost production[13].

Challenge 3: COVID-19 crisis mode distracts from climate change mitigation

The economic impact of the COVID-19 pandemic had a significant impact on Germany’s export-oriented economy. In particular global demand for German industrial manufacturing products fell sharply, causing the country’s exports to drop by 8% between January 2020 and January 2021 – this marked the largest year-on-year decrease in German exports since the financial crisis in 2009[14]. As a result, despite avoiding a lockdown during the first wave of the pandemic due to a relatively low number of COVID-19 cases, Germany’s GDP slumped by 11.7% compared to the same quarter in 2019.

The dip in manufacturing and consumption also hurt employment, causing a 5.7% decline in disposable income and consequently hitting consumer sentiment[15], leading to industry representatives declaring that “the pandemic overshadows everything else” while also warning that more ambitious climate change mitigation measures could ‘overwhelm’ Germany’s private sector[16]. The president of the ‘Bundesverband Deutscher Industrie’ (Association of German Industries) urged the government in October last year to make sure that tackling climate change ‘must not kill jobs’ while pointing out that the repercussions of the COVID-19 pandemic had considerably complicated the transition. However, he also emphasised that the country needed to change gear and move from ‘crisis mode’ to ‘future mode’, acknowledging that tackling climate change is essential.

Chancellor Angela Merkel and her cabinet indeed turned the switch from crisis to future mode in July 2020 presenting a €130billion COVID-19 recovery-weighted budget with nearly a third, €40billion, allocated to sustainable investments[17]. However, since finding itself in the middle of a third wave of the pandemic and a harder lockdown as a consequence, and a vaccination programme that has been struggling for months to gain speed, the country couldn’t help but fall back into crisis mode.

We’ll have a closer look at Merkel’s recovery budget as well as Germany’s 2019 climate programme in the next part: Germany’s green opportunities – country specifics, which should help in successfully reducing the country’s carbon footprint while also allowing its economy to prosper.

A long history of an environmental “psyche” and its world-renowned automobile industry going electric make for good green opportunities

From a country that set-out, at a pace unmatched by others, to transform its energy sector by phasing out nuclear power by 2022 and replacing it with renewables – the so-called ‘Energiewende’ (the word even made it into the English language) – observers would have expected it to come out a clear ‘winner’ amongst industrialised nations in the quest to bring down GHG emissions. While we’ve outlined that it hasn’t been quite as smooth a journey as many would have anticipated, Germany’s long history in environmental protection now stands the country in good stead for turning decarbonisation into a positive business case.

Opportunity 1: Risk awareness and granular data support green decision-making

(Green) Knowledge is (green) power. And no one could argue that German authorities aren’t unstintingly gathering data about climate change and other environmental issues to not only inform their policy making but also help businesses and private households to stay up to speed with green developments. In addition, they can make use of similar EU data.

We’ve picked a few examples of how the German authorities are using data[18]: In April last year, the German Environment Agency published a comprehensive research report that drilled down to specific aspects of climate change and their impact on the German economy. The report concluded that for regions outside the EU, the three climate change impact chains included in the model analysis (‘change in labour productivity’, ‘change in agricultural yields’ and ‘rise in sea level’) will result in major welfare and GDP losses, especially in China, India, South and Southeast Asia, the Middle East and Africa. The purchasing power of countries in those regions would decrease considerably over time compared to the reference development without climate change, leading to substantial indirect negative consequences for Germany as a trading partner. The report recommended that German businesses should aim for a targeted regional combination of trade and climate policy measures, which should include:

  • a strategic strengthening of German trade relations with world regions with low transfer effects for transnational climate risks (for example EU, Turkey, North America),
  • a broader diversification of the value chains of enterprises in order to be less dependent on individual (vulnerable) countries,
  • strategic support for adaptation measures in world regions that trigger particularly strong negative transnational trade effects in climate change (China, India, Southeast Asia). [19]

The risk assessments and the proposals are now guiding German foreign climate policy as well as the climate work of a number of industry organisations.

The “Umweltmonitor” from the German Environment Agency, extensively covered in the German media every year, is one example of annual detailed measurements being taken across the country to get an in-depth picture of the state of the environment. The reporting tool, which uses the traffic light system to indicate the severity of issues, focuses on ten key areas, which include climate, water, air (pollution), energy and transport. For 2020, the pollution of domestic rivers, the state of ecosystems and (a rising) temperature fell into yellow/red categories while air quality was awarded a green light[20].

Another example is the biannual representative study on ‘Environmental awareness’ from the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) and the German Environment Agency. Every two years since 1996, data on environmental attitudes and conduct of two cohorts of 2,000 citizens are collected and placed in the context of societal developments. The study maps three central dimensions of environmental awareness: emotions regarding the environment, environmental cognition and conduct with regard to the environment. The results of this survey have formed and are forming an important basis for the development of environmental policies and communication in Germany and are also providing businesses with a unique (and cost-free) opportunity to gain great insight into the green expectations of their customers[21].

Opportunity 2: Putting money where its mouth is – and an historic court ruling

In September 2019, with public pressure growing and Germany turning into an epicentre for the ‘Friday for Futures’ protests in Europe, the German coalition government agreed on a €54billion climate programme aimed at helping the country hit its 2030 emissions reduction goal[22]. While domestic environment organisations were quick to condemn the programme as ‘toothless’ and the budget to be well below what is required to fund a minimum of measures, critics still acknowledged that the announcement signalled the country had woken up to the fact that tackling climate change must be its first priority and that it was willing to put money where its mouth is. A comparison: the underlying budget for the UK’s Ten Point Plan for a Green Industrial Revolution totals £12billion[23] – less than a quarter of Germany’s €54billion. 

The climate programme, which became law in 2019 as the “Climate Protection Act” obliges the country to cut greenhouse gas emissions by 55% by 2030, compared to 1990 levels. A key component to achieve this is the launch of a national emissions trading system this year to price CO2 emissions caused by the building sector and by traffic and transport. Companies selling heating fuel (heating oil, gas, or coal) and fuel for vehicles are obliged to buy one certificate for every tonne of CO2 emitted by the products they sell. Starting with a fixed price of €10 per tonne of CO2 in 2021 the price will increase to €35 per tonne of CO2 in 2025. After 2025, the market will set the price, within a fixed band. Germany’s and the EU’s climate targets will determine the quantity of issued certificates[24]. Other key measures, apart from funding for research into low-carbon technologies and incentives for the industrial sector to increase its energy efficiency, include:

  • A reduction of the production capacity of the country’s coal-fired power plants to 30GW by 2022 and 17GW by 2030, with coal power phased out by 2038 at the latest and renewable energy sources to generate 65% of Germany’s power mix by 2030.
  • Continuation of the existing premium scheme for buying electric, hybrid, and fuel cell vehicles in order to achieve the country’s target to have 7-10 million electric vehicles registered by 2030.
  • A total of 1 million car charging stations to be available across the country by 2030, with petrol stations required to provide charging stations on their customer parking areas.
  • Financial support of €1billion per year (until 2024; increasing to €2billion per year as of 2025) for local public transport, encouraging bus fleet operators to switch to electric, hydrogen- and biogas-powered technology.
  • A reduced tax on rail tickets (VAT on train tickets will drop from 19% to 7%), and increased charges on air travel[25].

In summer 2020, Angela Merkel presented the government’s €130billion post-pandemic recovery budget, of which €40billion has been allocated for additional green investments, in particular research in hydrogen, electric vehicle subsidies and a fund to help bring power costs down, which have risen steeply in recent years due to the fact that German consumers have borne the cost of decarbonising the system through green levy surcharges[26].

However, just when the government might have thought that it had clearly shown its ambition to revive its aim to become an ‘environmental champion’, Germany’s highest court ruled in April this year that key parts of the country’s climate legislation from 2019 are insufficient and hence the Climate Protection Act is partly unconstitutional. The landmark ruling came after ‘Fridays for Future’ and other climate activists, supported by Germanwatch and Greenpeace, had sued the German government in early 2020 over what they said was its insufficient action to tackle climate change.

As a result, the Constitutional Court demanded the government to introduce details on GHG reduction targets for the period after 2030 by the end of 2022[27]. This resulted in new laws being drawn up to lift the 2030 reduction target to 65% and bring forward the net-carbon neutral date to 2045. To achieve these more ambitious milestones, the German government approved an ‘Immediate Action Programme’, worth 8 billion Euros, in June this year. The programme focuses on supporting the decarbonisation of the industrial sector, green hydrogen, energy-focused building refurbishments, climate-friendly mobility, as well as sustainable forestry and agriculture[28].

Opportunity 3: A collective belief creates an important economic sector around the circular economy

For a country whose private households assess that waste separation for the purpose of recycling is one of the most important contributions they can make to environmental protection[29], it is somewhat logical to rank first out of all EU member states in two circular economy indicators, namely the recycling rate of municipal waste and POLITICO’s Circular Economy Index[30].

From recycling leader, the country has also developed into an expert-nation for the circular economy concept: public circular economy initiatives are plentiful and well-coordinated at national level. The German national resource efficiency programme ProgRess, for example, outlines strategies for industry sectors and private consumers about how to foster resource conservation along the entire value chain, including improving the circular economy through better design, more sustainable and resource-efficient production and consumption and product after-use and waste management[31]. In 2019, a new Packaging Act came into force with increased recycling targets, incentives for reuse and design for recycling, and mandatory registration with the central packaging registry[32].

The national ambition has paid off: With a Gross Value Added (GVA) in 2017 of around €28.1billion (a 31% increase from 2010) and total revenues of €84.1billion (18% up from 2010) the closed-loop sector is an important economic factor in Germany: Around 10,700 enterprises belong to the “classical” market segments “waste collection, transport and street cleaning” and “waste treatment and utilization”, while almost 1,300 companies offer “technology for waste management” and another 3,300 companies ensure the cycle of collected and recycled materials from waste management in the “wholesale of waste materials” segment[33]. With around 310,000 employees, the closed-loop economy is one of the most important employers in the German environmental economy.

Furthermore, the country’s closed-loop economy has become an important player in global trade with plant, machinery and secondary raw materials: demand for modern technologies to build-up domestic disposal structures from countries around the world is soaring while equally an increasing volume of secondary raw materials are required to manufacture products. In 2018, Germany exported waste management technologies worth €5.1billion[34], and the country is very well positioned to take an even larger share of the closed-loop world market in the next few years.

Opportunity 4: German automobile industry – the country’s pride – goes fully electric

Amidst stricter EU emission standards – cars must achieve a 37.5% drop and vans a 31% decrease in CO2 emissions by 2030 compared to 2021 – the German automobile industry seems determined (after what looked like a hesitant start) to defend its global market dominance: currently offering 57 electric models between them, German car manufacturers have managed to grow their market share of electric cars in some major markets to a slightly higher proportion than their share of passenger cars overall: in the US, German electric cars made up 10% of the market (compared to a 8% market share of German cars overall) last year, in Canada 11% (10% overall market share) and in Japan 6% (5% overall)[35].

As early as 2011, Munich-headquartered BMW announced its new sub-brand, ‘BMW I’, to market its fully electric and hybrid vehicles. Porsche introduced its full-electric model ‘Taycan’ in 2019 with Audi following suit in the same year with its ‘e-tron’ range, built in the world’s first carbon-neutral factory in neighbouring Belgium[36], and Mercedes launching its fully electric ‘EQC’ in the first half of this year. Commenting on these new purebred electric models the New York Times wrote: “German engineering is confronting Silicon Valley audacity head on …”[37], referring to Tesla’s decision to build a gigafactory in Berlin.

Last year’s figures (2020) give reason for German carmakers to remain optimistic despite pioneer Tesla’s success: the automobile manufacturers managed to double their global production of battery-electric and plug-in hybrid vehicles, producing 866,000 pure electric and plug-in hybrid cars. This meant that more than a quarter of all electric passenger cars produced worldwide came off the assembly lines of German manufacturers in 2020[38]. The government’s plans to make one million car charging stations available across the country by 2030 and national incentives to stimulate demand for zero-emission cars should further help German car makers to increase sales, and so should the growing appetite for electric vehicles in the EU, where sales more than trebled in 2020 within a year to 10.5% now[39].

To complete our green picture of Germany, our third and last article about the country will analyse its Green Finance market.


[1]  exporthub.co: Top exporting countries in the world for 2020

[2]  germanwatch.org: Climate Risk Index (PDF)

[3]  euractiv.com:German farmers to get 340 million euro state aid for drought caused harvest losses

[4]  independent.co.uk: Industry group sees $8.2B insured damage from German floods

[5]  sueddeutsche.de: Hochwasser flutkatastrophe aufbaufonds

[6]  cleanenergywire.org: Germany top 20 countries most affected climate change NGO

[7]  tatsachen-ueber-deutschland.de: Pioneer climate policy

[8], [19]  umweltbundesamt.de: Impact CHAIN - Folgen des globalen Klimawandels für Deutschland (PDF)

[9]  umweltbundesamt.de: Iindicator greenhouse gas emissions

[10]  theguardian.com: Britain set for first coal free day since the industrial revolution

[11]  strom-report.de: Germany power generation 2020

[12]  theguardian.com:Germany to mothball largest coal power plants to meet climate targets

[13]  bbc.co.uk: Germany agrees plan to phase out coal power by 2038

[14]  home.kpmg: Economic key facts Germany

[15]  euromonitor.com: Impact of coronavirus in Germany in home products and experiences

[16]  welt.de: Klimaschutz Deutsche Wirtschaft fordert CO Vorgaben mit Augenmass

[17]  businessgreen.com: Germany unveils plans eur40bn climate spending surge

[18]  cleanenergywire.org: Polls reveal citizens support energiewende

[19]  see [8]

[20]  umweltbundesamt.de: Umweltzustand 2020: Umweltbundesamt zieht gemischte Bilanz

[21]  umweltbundesamt.de: Environmental awareness in Germany

[22]  bundesfinanzministerium.de: Climate action programme 2030

[23]  gov.uk: The ten point plan for a green industrial revolution

[24]  globalelr.com: German government adopts climate action programme 2030

[25]  politico.eu:German government announces multi-billion euro plan climate change

[26]  weforum.org: Germany green recovery billions sustainable investments

[27]  cleanenergywire.org: Landmark ruling German top court key climate legislation falls short

[28]  bundesregierung.de: Climate change act

[29], [33]  ifat.de: Status report on Germany's closed loop economy 2020

[30]  ecopreneur.eu: Ecopreneur Circular Economy Update report 2019 (PDF)

[31]  bmuv.de: German resource efficiency programme (PDF)

[32]  see [30]

[33]  see [29]

[34]  ifat.de: 2020 status report on the German circular economy

[35]  vda.de/en/topics/innovation-and-technology/electromobility/German-Car-Manufacturers-in-the-international-Market.

[36]  audi.co.uk: Brand story

[37]  nytimes.com: Tesla German automakers

[38]  vda.de: 210203-Deutscher-Pkw-Markt-im-Januar-r-ckl-ufig

[39]  euractiv.com: Sales of electric vehicles jump above 10 for first time in Europe

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top