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Germany’s ambitious decarbonisation plan may serve as an example for CEE

Germany, one of the longstanding proponents of the fight against climate change, has pledged serious decarbonisation goals, serving as a close-to-home example for the countries of Central and Eastern Europe.

Decarbonisation has become a major topic recently in CEE, especially with the introduction of the new Fit for 55 requirements. In terms of expectations, we can spot some differences in the region: Slovakia is quite close to reaching this target by 2030, but Poland is lagging behind with a 28 per cent forecasted reduction of emissions. Hungary and Czechia were well on track to previous goals (40 per cent and 46 per cent, respectively), but now have a significant gap to close. These countries are yet to formulate a clear plan for achieving these emission reductions. Therefore, taking a look at Germany’s plans, which might be a pioneer of its kind, may bring useful insights.

Germany’s new Climate Change Act aims for a 65 per cent reduction of greenhouse gas emissions by 2030 and GHG-neutrality by 2045. These targets are clearly ambitious since to meet them, the current level of emissions should be nearly halved in the upcoming nine years. However, the climate policies already in place will only allow for half of the reduction Germany seeks, indicating a need for considerable change in terms of the direction and magnitude of its climate strategy.

With the involvement of some 150 experts and over 80 companies and associations, the Federation of German Industries (BDI) and BCG created the joint study “Climate Paths 2.0” to pave the way for overcoming this challenge. The proposed policy recommendations have all made it into Germany’s new coalition agreement in some form or another.

Main policy instruments

In general, most of Germany’s fossil fuels investments will need to be eliminated to ensure the transition. Heat generation from green sources, a complete switch to hydrogen Direct Reduction Iron for primary steel, material defossilisation in basic chemicals and Carbon Capture and Storage plants in cement and lime will all play a vital role in industrial decarbonisation.

The electricity system also faces a tremendous challenge: while demand is expected to grow by 40 per cent by 2030, emission levels should drop by almost 60 per cent. To meet this target, the annual expansion of renewables shall be doubled while coal-fired power generation must be phased out by 2030. Ensuring the security of supply will also require 40 gigawatts (GW) of new hydrogen-ready gas capacity and a five-year acceleration of network development plans.

In transportation, nine out of 10 newly registered passenger cars should be fully electric, which will not only require boosting customer demand but a coordinated large-scale expansion of the charging infrastructure as well.

Replacing existing heating systems and equipping new buildings with emission-free solutions will also be an absolute necessity.

The hydrogen economy will be another key factor: a demand for 43 terawatt-hours (TWh) of green hydrogen will be created by 2030, requiring an adequate infrastructure and support for local, decentralised production.

Financial aspects

The proposed set of instruments is expected to require 860 billion euros of additional investments until 2030, with the energy industry alone representing nearly half of this figure.

Fiscal support will be essential to ensure the burden is not only shouldered by households and companies. Total public spending between 2021 and 2030 will require an additional 230 billion euros to 280 billion euros, which could be financed from changes in taxes and levies, reallocations of the federal budget, or even from debt. The magnitude of this government spending is historical, but not without precedent, considering the extent of the Marshall Plan, or the post-cold war Reconstruction East program.

Key considerations

Maintaining Germany’s competitiveness is a key concern since these measures may lead to a transfer of production (carbon leakage), or investment activity abroad (investment leakage), both detrimental to the German economy and resulting in higher foreign emissions generation. As a means of prevention, targeted compensation instruments should be introduced to reduce the financial burden caused by rising material and carbon prices.

Finally, the federal government needs to accelerate bureaucratic procedures substantially and provide continuous investment in innovation to make sure new technologies become commercially viable as well.

All in all, Germany’s outlined direction for decarbonisation is promising. Now it all comes down to implementation. CEE countries should watch closely and follow because the later they act, the more expensive their decarbonisation actions will be.

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