Under the Climate Action Programme 2030, Germany’s climate targets have obtained the status of law for the first time. The programme not only sets targets for the aggregate economy but also sets binding sub-targets for individual sectors such as transport, buildings, energy and manufacturing. This provides legal affirmation that Germany will meet its climate targets.
Compliance with these targets will be 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.
The Climate Action Programme 2030 is comprised of four key components:
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 will be 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 will be made cheaper and more attractive through (a) lower VAT rates on train tickets and (b) investments in infrastructure. Other measures include a bonus programme to promote purchases of electric vehicles as well as increased funding to promote the energy-efficient retrofitting of buildings.
Clear legal requirements for climate action
Incentives alone will not be enough, however. For this reason, the German government has decided that these newly enacted or expanded incentives will be backed up by (a) prohibitions of technologies that are especially harmful to the climate, (b) binding rules and (c) new standards. A long-term, reliable policy framework will give 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 will 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 is introducing tax incentives for replacing oil heating systems with alternatives that are more compatible with the climate. Then, 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 is also raising rates of motor vehicle tax on cars with high carbon emissions.
Socially equitable reforms of energy-related taxes
The Climate Action Programme 2030 introduces a price on carbon that aims to reduce carbon emissions from cars and heating systems while simultaneously spurring innovative low-carbon technologies. This is a crucial component in the overall effort to reduce carbon emissions. All of the additional government revenue generated by carbon pricing will reinvested in climate action measures or paid back to taxpayers. The German government wants to make sure that the costs of carbon pricing are distributed in an equitable way. To this end, people who have to bear particularly high costs as a result of certain programme measures will be granted relief in other areas, for example through lower electricity prices, an increase in the tax allowance for long-distance commuters, more generous housing benefit payments, and structural assistance for people who live in regions heavily impacted by the phase-out of coal.
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.
What impact will the Climate Action Programme have on the competitiveness of German industry 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 will build on its position as an innovative leading provider of climate-friendly technology and as a lead market for this technology. Particularly carbon-intensive sectors such as the cement and steel industries will be supported in developing climate-friendly technologies. In addition, the German government is boosting the market for electric vehicles 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 price is designed to increase over time, which also creates incentives to invest in research and development of low-carbon technologies. In the future, German-made carbon-neutral technology will represent an important contribution to global action on climate change 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.
How much will all of this cost? Are the allocated funds sufficient to ensure that Germany meets its climate targets?
The Climate Action Programme is the biggest climate action investment programme in Germany’s history, with a financial volume of €54bn between 2020 and 2023 alone. The Energy and Climate Fund will continue to be the main instrument for financing the energy transition and climate action measures in Germany. The German government expects that the measures outlined in the Climate Action Programme 2030, together with private sector measures taken on the basis of government incentives, will lead to investments in the hundreds of billions.
The programme’s measures combine major investments with direct tax revenue shortfalls (for example, through reduced VAT rates on long-distance rail travel). To cover these costs, the German government will draw on revenue from the current emissions trading system, which is pooled in the Energy and Climate Fund. It will also use the proceeds from various measures contained in the Climate Action Programme 2030, including revenue from (a) carbon emissions allowances in the transport and building sectors, (b) increases in air travel prices, (c) higher rates of motor vehicle tax on cars with high carbon emissions, and (d) a carbon surcharge on Germany’s HGV toll. [BILD]
Most of the measures – the carbon price, the new standards and the regulatory measures – will affect both private individuals and businesses. The government is also imposing obligations on the private sector, for example when it comes to building up a nation-wide network of charging stations for electric cars. Petrol station operators, for instance, will be required to provide charging stations. Operators of local electricity grids will also have to meet certain obligations.
The German government is committed to boosting climate-friendly transport. Alternatives to cars will be made increasingly inexpensive and attractive, and air travel will become more expensive. For example, government funding to expand and upgrade public transport systems is set to increase to €1 billion per year starting in 2021, and to €2 billion per year from 2025 onwards. Federal budget funding for transport will be restructured in ways that deliver more benefits to people who ride bicycles, walk or take public transport. To do this right, the federal government is working closely in tandem with local and state governments. Measures that the German government is taking 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 will be investing in improvements to the railway system and public transport. One of the aims here is to make rural areas better connected to cities.
Steps will also be taken to make low-emission cars – especially electric cars – more affordable and more attractive. Germany wants to achieve registration of 7–10 million electric cars in Germany by 2030. A bonus programme to promote purchases of electric cars aims to make these vehicles less expensive, especially models that cost less than €40,000. In addition, the tax rate on all-electric company cars in this price category will be cut from 0.5% to 0.25%. Falling electricity prices and plans to build one million charging stations by 2030 are also expected to boost the attractiveness of electric cars. In the years up to 2025, the German government will be providing financial assistance for these efforts.
Linking motor vehicle tax rates more closely with a car’s carbon emissions will make fuel-efficient cars less expensive and will lower incentives to buy fuel guzzlers. Putting a price on the carbon emissions produced by vehicles will make it more expensive to drive cars that consume a lot of petrol or diesel. Carbon pricing will be phased in incrementally according to a clear schedule in order to ensure that people and businesses are not confronted with unmanageable costs. In 2020, carbon emissions will be initially priced at €10/tonne, which will likely raise petrol and diesel prices by about €.03/litre. In 2025, the price on carbon emissions will go up to €35/tonne, which would correspond to a price hike of about €.10/litre on petrol and €.11/litre on diesel today. This means that no one has to run out and buy a new car immediately. But if someone is planning on buying a new car in the next few years, then it will be easier and more economical to choose a climate-friendly, fuel-efficient model.
People who have to travel long distances to get to work will be more heavily impacted by the carbon pricing scheme. The Climate Action Programme 2030 provides support for this group of people. After all, some people do not have the option of riding a bicycle or taking public transport to get to their workplace. In order to avoid putting long-distance commuters at a disadvantage, the German government will increase the commuter tax allowance from 30 to 35 cents for each kilometre above 20 kilometres. This measure will expire at the end of 2026.
The commuter tax allowance is not tied to specific means of transport. In other words, those who take the train or car-share benefit in the same way as those who drive. Long-distance commuters will be more heavily affected by the new carbon pricing scheme. Especially in rural areas, there is often no real alternative to driving a car. Given the housing shortages in metropolitan areas, people often have to travel long distances to get to work. Long-distance commuters who do not travel by car will benefit twice over: they will be able to claim the increased tax allowance, but will not have to pay higher fuel prices. At the same time, funds for local rail transport, such as underground trains, will triple to €1 billion from 2021 and double again to €2 billion per year from 2025. In addition, federal subsidies for regional rail transport will also be increased. Local transport services will thus be significantly expanded over the coming years. The increased allowance for long-distance commuters will expire at the end of 2026 – by then, a greater number of climate-friendly used vehicles will be available.
The Climate Action Programme 2030 expands existing funding programmes in order to enable as many homeowners as possible to invest promptly in needed housing retrofits. Measures will be taken to make climate-friendly products and behaviours more attractive and to reduce the attractiveness of products and behaviours that harm the climate. These measures will seek to influence the purchasing decisions of consumers: if they are planning on making housing-related investments, then incentives will be in place to facilitate climate-friendly choices (for example, to invest in heat pumps that use renewable energy and in building retrofits, rather than buying heating systems that use oil or gas). From 2026 onwards, the installation of oil heating systems in new buildings will generally no longer be permitted. In addition, new depreciation allowances will provide people with incentives to make climate-friendly investments in buildings, such as 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 house overnight. Instead, Germany’s long-term objective is to make buildings climate-neutral (i.e. with zero net greenhouse gas emissions) by 2050. This means that older buildings will have to be retrofitted by then and that existing energy efficiency standards for new buildings will have to be reviewed and improved.
Heating that runs on fossil fuels – i.e. oil or gas – will become more expensive over the long term. In 2020, carbon emissions will be initially priced at €10/tonne, which will likely raise heating prices by about €.03 per litre of heating oil and by about €.02 per kilowatt hour of heat using natural gas. In 2025, the price on carbon emissions will go up to €35/tonne, which would correspond to a price hike of about €.11 per litre of heating oil and €.06 per kilowatt hour of heat using natural gas. These price increases will be cushioned by lower electricity prices, because the turnaround in climate policy can succeed only if it works for everybody, and not everyone can afford a building retrofit or a new heating system.
Tenants have little influence over their heating costs, but the introduction of a carbon price means that they will have to pay more for their heating in the future. For this reason, the German government is looking at possible amendments to tenancy law that will limit landlords’ ability to shift the costs of carbon emissions to tenants. Tenants should not have to bear these extra costs on their own. Sharing the costs of carbon pricing is designed to create a dual incentive: tenants will be encouraged to engage in energy-efficient behaviour, and landlords will be encouraged to invest in climate-friendly heating systems and building retrofits. In addition, housing benefit (a benefit paid to low-income earners) will be increased by 10%.
The Climate Action Programme 2030 makes rail travel cheaper and more attractive. The VAT rate on long-distance rail travel will be reduced from 19% to 7%. This will reduce the price of a second-class train ticket from Berlin to Dortmund from about €100 to about €90, to give just one example. In addition, there will be massive investment in the rail network, with new trains and routes that will also enhance the attractiveness of rail travel.
At the same time, travelling by plane will become more expensive. The Climate Action Programme includes an increase in aviation tax. It also prevents dumping prices for air travel by prohibiting airlines from selling tickets at a price below the applicable taxes, charges, surcharges and fees. Although flight prices will rise only moderately, rail travel will become significantly more attractive by comparison. The long-term aim is to provide such good, fast train connections that domestic flights become largely unnecessary. Furthermore, the German government is providing funding to promote the development of alternative fuels for planes, with the aim of making air travel more environmentally friendly over the long term.
The German government will gradually lower electricity prices by reducing the levy charged on electricity consumers to promote renewable energy sources. This will reduce costs for low-income earners in particular while also helping to compensate for the carbon price. If revenue from carbon pricing increases, electricity prices will be further reduced because the government does not want to place excessive financial burdens on taxpayers. After all, the turnaround in climate policy can succeed only if it works for everybody. For this reason, the Climate Action Programme 2030 places a special emphasis on social cohesion.
At the same time, cheaper electricity will encourage people to buy electricity-driven products such as electric cars and heat pumps. It is also crucial to carry out a major expansion and upgrade of power grids. This will be done within Germany itself but also together with our European neighbours. Flexibility in the consumption and storage of electricity will bring more rewards in the future as well.
Naturally, Germany will be making its electricity supply greener. The Climate Action Programme 2030 sets out a clear time frame for phasing out the use of lignite and hard coal to generate electricity. In addition, for the first time, the programme sets the specific target that 65% of Germany’s gross electricity consumption is to be produced from renewable energy sources by 2030. The government will continue to promote the use of renewables: it is eliminating the current cap on solar energy expansion and expanding the use of wind power while also improving the regional distribution of land-based wind power installations. Because the German government has set binding climate targets and established procedures to monitor and adjust these targets on a long-term basis, investors now have greater planning certainty, which will add further momentum to the expansion of renewable energy.
There is one simple principle behind the idea of carbon pricing: whoever is responsible for carbon emissions should pay for them too. Up to now, this has applied only to the manufacturing and energy industries, which are already subject to the EU’s emissions trading system. Now Germany is introducing its own emissions trading scheme, which will launch in 2021. Germany’s system will cover additional sectors that are not covered by the EU’s emissions trading system – namely transport and heating (which produce emissions from the burning of heating oil, natural gas, petrol and diesel). The new system will work like this: Companies that want to sell fossil fuels will have to acquire emissions allowances for every tonne of carbon that is emitted as a result. These companies will then pass the extra costs on to consumers in the form of higher prices for heating oil, natural gas, petrol and diesel.
The intended effect here is (a) to make climate-friendly products and behaviours more attractive and to reduce the attractiveness of products and behaviours that harm the climate and (b) in this way, to influence consumers’ purchasing decisions when they buy things like cars and heating systems, for example. There will be a fixed price on carbon emissions for the first five years. 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 €35 (minimum) to €60 (maximum) per tonne of carbon emissions. The level of market demand will determine the price within this range. The specific design of the national emissions trading system for the years from 2027 onwards will not be decided by the German government until 2025, because by then there will have been an opportunity to gain more detailed experience with emissions trading schemes. Ultimately, the German government wants to eliminate the minimum and maximum price thresholds and to set emissions levels that are consistent with Germany’s climate targets.
Introducing carbon pricing is a complex process that brings the administration into uncharted territory. Technical implementation will require a lead time of several months. For this reason, the German government has decided that carbon pricing should come into effect on 1 January 2021.
The relatively low starting price of €10 per tonne of CO2 was chosen deliberately. The idea is that the steering effect should unfold gradually so that individuals and companies have time to adapt. After all, climate-friendly alternatives cost money. The federal government wants to create incentives to ensure that, when the times comes to buy a new car or install a new heating system, consumers will choose a climate-friendly product. A sudden hike in the price of carbon would place a burden on individuals without actually reducing carbon emissions. It would also have considerable undesirable redistributive effects, since higher heating or petrol costs would hit average earners much harder than high-income households. The best approach is not a short-term price change, but rather a steady price path over an extended period.
The carbon price will gradually rise to €35 per tonne by 2025. In 2026, there will no longer be a fixed price, but rather a price range with a minimum price of €35 and a maximum price of €60 per tonne of CO2. In addition, there will be a cap on carbon emissions, which will be lowered every year. The cap is based on the climate targets to ensure that the targets for the transport and buildings sectors are met by 2027 at the latest.
But it’s not all about the actual carbon price. The Climate Action Programme includes further pricing elements that will contribute to the same aims. For example, motor vehicle tax will be reformed into an emission-based tax, which will create a stronger steering effect for new vehicle purchases.
All revenue generated from carbon pricing will be returned to taxpayers or invested in climate action. In addition, people who are hit particularly hard by certain programme measures will be granted relief in other areas. Under the Climate Action Programme, the aspect of social equity is taken into account from the outset. The idea behind this is simple: the turnaround in climate policy can succeed only if it works for everybody.
Carbon pricing will be phased in incrementally according to a clear schedule in order to ensure that people and businesses are not confronted with unmanageable costs. At the same time, the German government will provide taxpayers with relief to mitigate the additional costs.
Some people do not have the option of riding a bicycle or taking public transport to get to their workplaces. Many people are dependent on cars, especially in rural areas. Therefore, in order to avoid putting long-distance commuters at a disadvantage, the government is increasing the tax allowance for long-distance commuters from 30 to 35 cents per kilometre for distances over 20 kilometres. This measure will expire at the end of 2026.
Lower electricity costs: The German government will gradually reduce the levy charged on electricity consumers to promote renewable energy sources. This will help low-income earners in particular while also making electricity-driven products (like heat pumps and electric cars) more affordable. If revenue from carbon pricing increases, electricity prices will be further reduced.
Additional compensation will come via tenancy law and will help recipients of housing benefit in particular. To avoid a situation in which rising heating costs lead to social hardship, housing benefit will be increased by 10%. In addition, the German government is looking at possible amendments to tenancy law that will limit landlords’ ability to shift the costs of carbon emissions to tenants. This is because tenants have little influence over their heating costs, but the introduction of a carbon price means that they will have to pay more for their heating in the future. They should not have to pay all of the additional costs. Sharing the costs of carbon pricing will create a dual incentive: tenants will be encouraged to engage in energy-efficient behaviour, and landlords will be encouraged to invest in climate-friendly heating systems and building retrofits.