Grosse Koalition, small Klimapaket

Much was expected of the new climate package negotiated by the grand-coalition government in Berlin. Less was delivered.

In Germany Friday September 20th 2019 was billed as the moment at which Angela Merkel’s Grosse Koalition would reclaim leadership in climate politics. There was even talk that green investment might serve as a justification for overriding the Schuldenbremse (debt brake)—the 2009 constitutional amendment which constrains government borrowing at both national and local levels.

A large part of the German public is mobilised. On September 20th perhaps as many as 1.4 million demonstrators were on the streets calling for climate action. But if they expected the ‘GroKo’ to answer their call, they were to be disappointed. The Klimapaket (climate package) which emerged at midday after a night of intense negotiations fell far short.

Indeed it suggests that on climate Germany no longer aspires to lead from the front. If this is the case, it marks an important historic shift—with wider implications for Europe.   

Thirty years ago, when climate change first bubbled to the top of the global political agenda, Germany was a leader not just in Europe but worldwide. In 1995 a youthful Merkel chaired the first of the United Nations COP conferences in Berlin. The red-green coalition government of 1998-2005 created a subsidy system which triggered a pathbreaking expansion of renewables. It also negotiated a long-term plan for a nuclear exit.

Opposite direction

Merkel’s first grand coalition did not deviate from this policy. But change came in 2011 with the snap decision to accelerate drastically the exit from nuclear power. One might have expected this to be combined with an intensified push into solar and wind. But, instead, in 2013 Berlin chose the opposite direction.

The renewables levy, which is imposed on household electricity consumers and not on industry, was driving electricity prices for those on lower incomes to painful levels. On the other hand, the financial viability of traditional generators was being destabilised by the huge surge in renewable capacity. To counter both effects, Merkel’s second government, a coalition with the pro-business Free Democrat Party, decided to slow down the pace of growth in renewables. Meanwhile, at a local level, a flurry of court cases reduced the construction of new windfarms to a snail’s pace.

If Europe-wide investment in renewables is currently at a low ebb, much of that is attributable to Berlin’s retreat. Germany’s fleet of dirty, lignite-fuelled power stations gained a new lease on life.

By the time the latest Groko was formed last year, it was clear that the emission goals for 2020 were unlikely to be met. Due to its heavy reliance on coal, Germany’s emissions per capita are almost twice those of France. With the issue of climate change rising up the political agenda, the GroKo needed to act.

Coal commission

Over the winter of 2018-19, a commission was appointed to decide a timeline for the shutdown of Germany’s coal-fired capacity. But the shadow of the far-right Alternative für Deutschland and the gilets jaunes movement in France hung heavily over its negotiations. The AfD polls strongly in the eastern coal-mining regions. Local action against pollution from diesel motors was provoking an anti-environmental backlash.

The result was a compromise that stretched the horizon of coal to 2038 and, in the name of a ‘just transition’, promised a long list of compensating grants and payments. Even if these turn out to be window-dressing, the protracted exit from coal makes it less likely than ever that Berlin will actually meet its Paris climate commitments by 2030.

Meanwhile, the Greens were riding high in the polls and every Friday saw noisy demonstrations in Berlin and other cities. Seizing the moment, the authoritative Sachverständigenrat, advised by the Potsdam Institute for Climate Impact Research, advocated a fresh start. Germany’s climate policy was hobbled by the inconsistent system of taxes and subsidies accumulated over many years. What was needed was decisive political commitment to a uniform carbon price, offering investors a clear roadmap to decarbonisation.

A carbon tax designed to penalise major polluters, with the revenue being redistributed in the form of a carbon dividend, is the option now favored by experts in most countries. But opposition from the business wing of the Christian Democrats ruled out a new tax. Instead, on September 20th the GroKo opted for a hybrid emissions-trading system.

Since 2005 the European Union has operated such a system for large-scale industry, air transport and power generation. Berlin will complement this with a national system to cover transport and domestic heat. This will start as a fixed-price system, functionally equivalent to a tax. Only in 2026 will the certificates be tradeable.

Shockingly inadequate

The Ministry for Economics had proposed a starting price of €35 per ton. But that was too much for the Christian Social Union and the Social Democrats, who both fear the AfD. They could agree on €20 per ton, but no earlier than 2022. The result of this strange left-right coalition was a shockingly inadequate compromise under which certificates will be sold at a fixed price starting at €10 per ton in 2021, rising to €35 per ton by 2025. Trading of the certificates will not start until 2026. There will be a minimum price of €35 per ton but prices will not be allowed to exceed €60 per ton. The revenue thus generated will be used to reduce the burden of the renewable-energy levy on consumers of electricity.

It is a neat political compromise—but one that flies in the face of every serious estimate of the carbon price necessary to achieve rapid decarbonisation. The experts, led by the heads both of the German government’s own environmental agency (Umweltbundesamt) and the Potsdam Institute, are unanimous in their condemnation. It is not enough to give decarbonisation a decisive push and it is far lower than the carbon prices set in Switzerland and Sweden.

Defenders of the package insist that price is not everything. Indeed, it is a questionable neoliberal conceit that markets alone can deliver a solution. And the climate package does contain a colourful bouquet of other proposals.

For instance, it contains a range of measures to improve the efficiency of domestic energy use, of which the most eye-catching is a ban on the installation of new oil-fuelled domestic heating systems. But this will come into effect only in 2026 and only in cases where an alternative system is feasible. The CDU did not want to cause undue anxiety to older voters.

Transport is the sector where emissions reduction has so far been least impressive and where the vested interest of Germany’s car industry is strongest. To accelerate the change to e-mobility, the GroKo commits itself to installing one million charging stations by 2030 and to extending tax benefits to the purchase of electric vehicles, while raising vehicle taxes on heavily polluting cars. In addition, it promises to raise federal subsidy for local public transport to €1 billion per annum as of 2021 and to €2 billion from 2025.

The most visible impact of the package may turn out to be on the railways. The climate package incorporates an agreement reached earlier in the summer to invest €86 billion in repairs to Germany’s ailing rail system. In addition, the federal government has promised to raise its capital commitment annually. With additional spending on extending the network, digitisation and funds from the coal deal, on an optimistic reading total Bundesbahn investment may rise to €156 billiion by 2030, which would be largest programme in its history.

All told, the coalition hopes to cut air travel and double the number of long-distance rail trips taken by Germans to 260 million by that year. An increase in the tax on airline tickets will pay for a reduction in the VAT charged on rail fares. But though this will be popular with voters, it is cargo traffic not passenger trips that is decisive for decarbonisation and on this the climate package is far less detailed.

The same is true for power generation, where the goal remains a renewable share of 65 per cent by 2030. At the rates of investment prevailing since 2013, Germany will be lucky if it comes anywhere close. And there is little in the package to make one more optimistic.

The approach to onshore wind power remains restrictive. Pandering to NIMBYism, it requires that windmills be sited at least 1km away from any centre of population, another concession to the Bavarian CSU. As far as photovoltaic generation is concerned the cap of 52GW, which would have shut off subsidy as of next year, is lifted. But no new support is offered and there is no proposal to address the dysfunctional auction system for electricity contracts, which has brought renewable-energy expansion to a halt.

Fossil-fuel subsidies

Any hopes that the climate package would break with the debt brake and deliver a substantial fiscal boost to Germany’s troubled manufacturing sector have been disappointed. Even on official estimates the net stimulus impact of the climate package is tiny—0.5 per cent of gross domestic product by 2030. The social-democrat finance minister, Olaf Scholz, has reaffirmed his commitment to the Schwarze Null. In truth, if the aim is to find funding for renewables, it would be easy to free up funds by slashing subsidies, for instance, to the carbon-intensive energy sector, which again according to official estimates currently run at around €20 billion per annum. But there is no mention of fossil-fuel subsidies in the package.

So uniform has been the criticism of the GroKo package that the SPD has found itself under pressure to go back to the drawing board. The Greens were not involved in the negotiations and have denounced it. In the federal chamber, the Bundesrat, they exercise a veto over any legislation. The SPD has already signalled its willingness to reopen the question of the carbon price, though it bears a large part of the blame for the inadequate compromise.

Perhaps the best thing that can be said for the package is that it creates a mechanism by which ministries will be held accountable for their performance in emissions reduction. It is thus the beginning rather than the end of an argument.

And that goes for the emissions-trading proposal too. As the cabinet paper makes clear, the ultimate German aim is to achieve a reform and expansion of European emissions trading which will fix a minimum price for carbon and widen the scope to include transport, housing, small-scale industry and agriculture. The climate cabinet resolved that Germany will work closely with the European Commission in this direction. But it avoids any talk of leadership. Instead, what Germany commits itself to being is a ‘fair’ international partner. This is a significant shift.

Leadership issue

Earlier in the summer, a little-noticed section of the Sachverständigenrat report addressed the issue of leadership directly. The economic experts called on Germany to set an example by honouring its commitments and demonstrating that these can be met even by a heavily industrialised country. But they advised against indulging in any pretensions to leadership (Vorreiterrolle) by exceeding Germany’s contractual obligations.  

The rationale was that advertising Germany’s eagerness for action would only serve to encourage others to freeride. That was the lesson taken from the disastrous Copenhagen climate talks ten years ago. While the over-eager EU was sidelined, it was the reluctant nation-states—the US, China and India—which set the terms of the agreement. To avoid that fate, the Sachverständigenrat urged that any steps beyond Germany’s contractual obligations should be strictly conditional on reciprocity. The key was not to offer too much upfront. The tougher one’s initial position, the better the likely outcome of such negotiations.

As its fellow members know from bitter experience, in the eurozone Germany has developed such defensive bargaining into a fine art. If this is the new tactic to be adopted in climate policy then the GroKo climate package will provide Germany’s negotiators with the ammunition they need.

Berlin has staked out its opening position in minimal terms. It is certainly not promising too much.

This article is a joint publication by Social Europe and IPS-Journal