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31 August 2022

Climate action

Climate Action Programme 2030: frequently asked questions

Germany has made both national and international commitments to cut its greenhouse gas emissions by more than half by 2030, compared with 1990 levels. To this end, the German government has launched a comprehensive climate package. What are its key elements? How does carbon pricing work? And how much will all of this cost? Here are the answers to these and other important questions.

What is the Climate Action Programme?

When Germany revised its Climate Action Act in 2021, it pledged to cut greenhouse gas emissions by at least 65% by 2030 (compared with 1990 levels) and to make Germany carbon-neutral by 2045.

The German government’s Climate Action Programme 2030 – together with an Immediate Climate Action Programme for 2022 that was adopted in June 2021 – is designed to ensure that Germany meets its climate targets. The individual measures contained in these two programmes are being implemented step by step in the form of legislation and funding programmes.

Germany has set targets for the aggregate economy along with binding sub-targets for individual sectors such as transport, buildings, energy and manufacturing. Compliance with these targets is reviewed on a regular basis. If the measures adopted for any particular sector turn out to be insufficient for meeting the targets, the consequences are stipulated clearly: the ministry with lead responsibility must follow up without delay and put an immediate action programme in place within three months. Taken together, this means that Germany’s climate policy is more binding than ever before.

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What are the main elements of the Climate Action Programme?

The Climate Action Programme 2030 is comprised of four key components:

  1. Major investments in measures to mitigate climate change, plus large-scale funding programmes
    The German government is creating additional, clear-cut incentives to reduce carbon emissions. Specific measures are being taken to ensure significant reductions in individual sectors (especially transport, buildings, manufacturing, energy and agriculture). These measures include major public investments, large-scale funding programmes and tax incentives. For example, rail travel is being made cheaper and more attractive through (a) lower VAT rates on train tickets and (b) major investments in infrastructure. Other measures include a bonus programme to promote purchases of electric cars as well as extensive funding to promote the energy-efficient retrofitting of buildings.
  2. Clear legal requirements for climate action
    Incentives alone aren’t enough. For this reason, the German government is backing up these newly enacted or expanded incentives with (a) bans on technologies that are especially harmful to the climate, (b) binding rules and (c) new standards. A long-term, reliable policy framework gives companies and individuals sufficient time to shift to climate-friendly alternatives. For example, if someone is planning to buy a new car or install a new heating system in the near future, the new rules and standards make it easier for them to choose a product that is better for the climate.
    Take oil heating, for example: no one will be required to remove their oil heating system overnight. However, the German government has introduced powerful tax incentives for replacing oil heating systems with greener alternatives. From 2026 onwards, new oil heating systems will no longer be permitted, apart from rare exceptions. In addition, on top of measures encouraging people to buy electric cars, the German government has also raised rates of motor vehicle tax on cars with high carbon emissions.
  3. Socially equitable carbon pricing
    Germany launched a fuel emissions trading scheme on 1 January 2021 that is playing a key role in reducing carbon emissions while simultaneously spurring innovative low-carbon technologies. Germany’s carbon pricing system is based on the “user pays” principle: this means that those who do less to pollute the atmosphere also pay less. Every euro that the system takes in is paid back to individuals and businesses. For example, the “EEG surcharge” (a levy paid by electricity consumers to promote renewable energy) was abolished as of 1 July 2022 – six months earlier than originally planned – and measures to promote renewable energy sources are now fully financed with federal funds. This reduces the overall cost burden on electricity consumers by an additional €6.6 billion. In addition, the revenue from Germany’s carbon pricing scheme will be paid back directly to the public in the form of funding programmes that target priorities such as energy-efficient building retrofits and the expansion of charging networks for electric cars.
  4. Sector-specific system to monitor compliance with climate targets
    Germany’s “climate cabinet” (a committee originally set up in March 2019) will be made permanent and will be tasked with monitoring the effectiveness, efficiency and target accuracy of the new measures. If any sector fails to comply with its climate policy obligations, the government ministry with lead responsibility will be required to make adjustments, including the adoption of an immediate action programme to bring the sector in question back on track.

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What is the Climate Action Programme’s impact on the competitiveness of the German economy and on the German labour market?

Sectors that are unable to make the transition to climate-friendly technologies are not fit for the future. The Climate Action Programme can thus be seen as a modernisation programme for the German economy. With the help of targeted support for research and development, a long-term regulatory framework and market incentives, Germany is building on its position as a leading provider of innovative climate-friendly technology and as a lead market for this technology. Sectors that are especially carbon-intensive – such as the cement and steel industries – are receiving support for the development of climate-friendly technology. In addition, the German government is boosting the market for electric cars and taking steps to attract battery cell manufacturers to Germany to ensure that the cars of the future are made in this country. The carbon pricing scheme – with a carbon price that is designed to increase over time – also creates incentives to invest in the development of low-carbon technology. In the future, German-made carbon-neutral technology will make an important contribution to global climate action and will further enhance Germany’s strength as a major exporter of cutting-edge technology.

All this will help Germany meet its climate targets and contribute to global efforts to fight climate change. As one of the world’s biggest economies, Germany needs to set an example when it comes to making its economy and way of life climate-neutral while also maintaining its prosperity.

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How is the Climate Action Programme 2030 financed?

The Climate Action Programme 2030 is the biggest climate action investment programme in Germany’s history. The main instrument that is used to finance measures promoting the energy transition and climate action in Germany is the Climate and Transformation Fund.

In 2020 and 2021, over €80 billion was earmarked for climate action investment under the Climate Action Programme and the economic stimulus package. The Immediate Climate Action Programme for 2022 added an extra €8 billion. €60 billion more was allocated to the Climate and Transformation Fund as part of the supplementary budget for 2021.

The German government expects that the Climate Action Programme’s incentives and funding measures will lead to investments totalling hundreds of billions of euros by the year 2030. To cover these costs, the German government will draw on revenue from the EU emissions trading system, which is initially paid into the Climate and Transformation Fund, along with proceeds from the national emissions trading scheme that was launched on 1 January 2021.

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What is changing for road and public transport users?

The German government is committed to boosting climate-friendly transport. Alternatives to cars are being made cheaper and more attractive, and air travel is being made more expensive. Measures that the German government has taken include reducing the VAT rate on long-distance rail travel from 19% to 7% and increasing the tax on plane tickets. In addition, the government is investing in improvements to the railway system and public transport. One of the aims here is to make rural areas better connected to cities. The 2022 federal budget also provides extra funding for investments in cycling infrastructure. To do this right, the federal government is working together closely with local and state governments.

Steps are also being taken to make low-emission cars – especially electric cars – more affordable and more attractive. Germany wants to register 15 million electric cars by 2030. A bonus programme to promote purchases of electric cars aims to make these vehicles less expensive. In addition, the government has reduced the tax rate from 0.5% to 0.25% on all-electric business cars costing up to €60,000. Measures to lower electricity prices and plans to build one million publicly accessible charging stations by 2030 are also intended to boost the attractiveness of electric cars.

Motor vehicle tax rates are now more closely linked to a car’s carbon emissions. This makes fuel-efficient cars less expensive and reduces incentives to buy fuel guzzlers. In addition, Germany has launched a carbon pricing system that makes it more expensive to drive cars that consume a lot of petrol or diesel. This system is being phased in incrementally in order to ensure that people are not confronted with unmanageable costs. The initial price on carbon emissions in 2021 was €25 per tonne, which was roughly equivalent to 7.1 cents per litre of petrol and 8.0 cents per litre of diesel. In 2022, the price on carbon was increased to €30 per tonne, or by about 1.5 cents per litre of petrol or diesel. In 2025, the price per tonne of carbon will rise to €55, which is roughly equivalent to an increase of 7.1 cents per litre of petrol or 8.0 cents per litre of diesel over today’s prices. From 2026 onwards, the price on carbon is expected to be set within a range of €55 (minimum) to €65 (maximum) per emission allowance.

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What is changing for commuters?

The Climate Action Programme 2030 provides support for people who have to travel long distances to get to work and who will be more heavily impacted by the carbon pricing scheme. Some people do not have the option of riding a bicycle or taking public transport to get to their workplaces. In order to avoid putting long-distance commuters at a disadvantage, the German government increased the commuter tax allowance in 2021 from 30 to 35 cents for each kilometre above 20 kilometres. From 2024 onwards, the commuter tax allowance will be increased by an additional 3 cents for a period of three years (to 38 cents for each kilometre above 20 kilometres). This will provide relief to people who depend on their cars to get to work and will give them enough time to make the switch to a more climate-friendly type of car.

The government has also introduced a “mobility premium” to provide relief to low-income earners. This benefits people who pay no income tax due to their low level of income and who therefore do not qualify for the commuter tax allowance. Low-income earners with long-distance commutes can claim the “mobility premium” as work-related expenses or business expenses for each kilometre above 20 kilometres.

At the same time, local transport services will be improved and expanded significantly in the coming years. One billion euros have been earmarked for investment in local rail transport, and this amount will be doubled to €2 billion per year from 2025 onwards. In addition, federal subsidies for public transport have also been increased.

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What is changing for tenants, homeowners and house-builders?

The Climate Action Programme 2030 expands existing funding programmes in order to enable as many homeowners as possible to invest in housing retrofits as needed. The German government is making climate-friendly products and behaviours more attractive while reducing the attractiveness of products and behaviours that harm the climate. For example, funding is being provided to promote the switch to heat pumps, but not for upgrades of heating systems that use oil or gas. From 2026 onwards, it will no longer be permitted to install oil heating systems in new buildings.

Furthermore, tax relief is being provided to encourage climate-friendly investments in owner-occupied housing. This includes investments in new heating systems, new windows, and insulation for roofs and exterior walls. No one will be required to replace their current heating system or insulate their home overnight.

Instead, Germany’s long-term objective is to make the building sector – like all sectors – climate-neutral by 2045. This means that Germany aims to have a building stock with zero net greenhouse gas emissions by that time.

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What is changing for leisure travellers?

VAT on long-distance train tickets has been reduced from 19% to 7%. This has made rail travel cheaper and more attractive. In addition, major investments are being made in the rail network, with new trains and routes that will further enhance the appeal of rail travel. The long-term aim is to make rail transport so good and fast that domestic flights become largely unnecessary.

Aviation tax rates were increased as of 1 April 2020. The rate has been raised from €7.50 to €13.03 for flights covering distances of up to 2,500 kilometres, from €23.43 to €33.01 for flights covering distances between 2,500 and 6,000 kilometres, and from €42.18 to €59.43 for flights covering distances greater than 6,000 kilometres.

In addition, airlines will be prohibited from selling tickets at prices below the applicable taxes, charges, surcharges and fees. Furthermore, the German government is providing funding to promote the development of alternative fuels for planes, with the aim of making air travel more environment-friendly over the long term.

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What is changing for me as an electricity consumer?

Revenue from the carbon pricing scheme is being used, among other things, to reduce the cost of electricity for consumers. The “EEG surcharge” (a levy that electricity consumers paid to help expand renewable energy use) was abolished as of 1 July 2022, and measures to promote renewable energy sources are now fully financed with federal funds. This benefits all electricity users while providing above-average relief to low-income households.

Lower electricity prices encourage people to buy electricity-driven products such as electric cars and heat pumps. In addition, it is crucial to carry out a major expansion and upgrade of power grids. This is being done both within Germany itself as well as jointly with neighbouring countries. Flexibility in the consumption and storage of electricity will bring more rewards in the future as well.

Naturally, Germany plans to make its electricity supply greener. In 2020, the German government adopted the Act on the Reduction and Termination of Coal-fired Electricity Generation and Amending Further Acts. The legislation sets out a precise roadmap for shutting down coal-fired power stations, which are harmful to the climate. Ideally, Germany’s governing coalition aims to phase out coal by 2030. The Federation plans to allocate €40 billion for this structural transformation. The funds will help the affected regions to build new capacity and create new jobs.

The Climate Action Programme sets a binding target of 65% for the share of Germany’s gross electricity consumption that is to be generated from renewable energy sources by 2030. The government continues to promote the use of renewable energy. For example, it is eliminating the current cap on solar energy expansion. In addition, it is expanding the use of wind power while also improving the regional distribution of land-based wind power installations. By adopting binding climate targets, the German government is providing investors with greater planning certainty, which in turn adds further momentum to the expansion of renewable energy.

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How does carbon pricing work exactly?

There is a simple principle behind the idea of carbon pricing: whoever is responsible for carbon emissions should pay for them too. Until 2021, this applied only to the manufacturing and energy industries, which were already subject to the EU emissions trading system. Then in 2021, Germany launched its own emissions trading system. The national system applies to all fossil fuels – such as heating oil, natural gas, petrol and diesel – that are not covered by the EU scheme. The new system works like this: companies that put fossil fuels into circulation are required to purchase a certain number of emission allowances for each tonne of carbon generated by these fuels. These companies then pass the extra costs on to consumers in the form of higher prices for heating oil, natural gas, petrol and diesel.

This has the effect of making climate-friendly products and behaviours more advantageous while reducing the attractiveness of products and behaviours that harm the climate – potentially a key factor when people buy cars and heating systems, for example. In the launch phase from 2021 to 2025, the carbon content of fossil fuels is being given a fixed price that increases on an annual basis. This is crucial for providing consumers and businesses with the certainty and reliability they need in order to make short- and medium-term purchasing and investment decisions. Emissions trading will then start in 2026. Allowances will be auctioned within a price range of €55 (minimum) to €65 (maximum) per tonne of carbon emissions. The level of market demand will determine the price within this range. The German government advocates an EU-wide carbon pricing system in the heating and transport sectors that would replace Germany’s national scheme. Germany also supports the European Commission’s proposals to expand emissions trading as part of the EU’s “Fit for 55” package.

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What is carbon pricing revenue used for?

All revenue from the carbon pricing system is reinvested in climate action measures and returned to taxpayers. The revenue first flows into the Climate and Transformation Fund. The Fund is the main instrument for financing measures that work to everyone’s advantage and that assist people in making the transition to climate-friendly alternatives – this includes carrying out building retrofits, replacing heating systems and buying low-emission vehicles. In addition, the German government eliminated the “EEG surcharge” – a surcharge that was included in electricity bills for the purpose of promoting renewable energy sources. This benefits all electricity consumers. Measures to promote renewable energy sources are now fully financed with federal funds.