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A brief analysis of the new coalition agreement


What the new coalition means for climate policy in Germany: an assessment of the coalition agreement and the way forward

The new coalition agreement in Germany represents the initial impetus for a social market- and innovation-oriented climate and energy policy, which must be followed by concrete measures. The coalition agreement of the “traffic light coalition” of the Social Democratic Party, the Green Party, and the Free Democratic Party in Germany, presented on November 24, clearly commits to the goal of the Paris Climate Agreement to limit global warming to 1.5°C and wants to lay the foundation for sustainable prosperity on the path to climate neutrality. The approaches outlined to achieve this represent in many areas more than the lowest common denominator of the programs of the coalition partners, and at their core endorse a targeted social market- and innovation-oriented approach towards achieving climate neutrality, which we at EPICO welcome.

At the same time, the goals are highly ambitious, especially in the area of renewable energies, which must make a continuous sprint towards expansion until 2030 in order to be able to cover 80 percent of the growing gross electricity demand of 680 to 750 terawatt hours. To achieve this, the lengthy planning and approval procedures must be significantly streamlined in order to remove major stumbling blocks for power generation and infrastructure projects. This is a multi-faceted challenge, which will be a litmus test for the new coalition, which has placed decarbonisation at the core of its work programme.

In addition to the accelerated ramp-up of marketable technologies such as renewable energies and e-mobility, as well as the expansion of the corresponding infrastructure, we see potential to pragmatically increase the pace of innovation in the field of hydrogen and to stimulate self-sustaining decarbonisation markets. In this context, we welcome the aim of establishing a European minimum price and the support of the ‘climate clubs’. The planned budgetary financing of the levy under the Renewable Energy Act (Erneuerbare-Energien-Gesetz or EEG) (the levy paid by consumers for the minimum compensation for the electricity fed into the grid or a market premium) is a prudent step towards achieving social balance through reduced electricity costs for households, as well as providing a level-playing-field for sector coupling. Furthermore, Power Purchase Agreements (PPAs) should play a more important role as a building block for the transition to a climate-neutral electricity system.

Decisive for the success of the coalition with regard to these key issues will be the concrete proposals for measures that must now follow in the areas of climate protection, energy and innovation. A concise explanation and analysis of some of the core proposals is presented below.

I. Climate protection through an ambitious emissions trading system

It is a positive development that carbon pricing as a driver for climate neutrality has found a prominent place in the coalition agreement of the new German government, with proposals for further development of emissions trading at the German, European and international level.

The proposal to introduce an EU-wide minimum carbon price and the harmonisation of the German emissions trading system with the proposed European emissions trading system for heating and mobility signal an ambitious climate policy in Germany and Europe. Further, the commitment to a global carbon price, climate clubs and international climate partnerships to avoid carbon leakage indicate a stronger contribution to carbon pricing at the international level.

The coalition has also recognised the importance of considering the social aspects of the imminent transition resulting from the expansion of the carbon pricing system. The abolition of the EEG levy and the introduction of a more far-reaching social compensation mechanism are mentioned in the coalition agreement in this context. However, the coalition agreement provides neither the details of the compensation mechanism, nor a concrete timeframe for implementing and coordinating these two measures.

Next steps

The new coalition already envisages goal-oriented measures for the further development of carbon pricing. It should quickly develop the requisite concrete measures with a view to the upcoming decisions in the EU on emissions trading and the border adjustment mechanism as well as the upcoming German G7 presidency, and use its political capital for engaging with its partners.

II. The path to a climate-neutral electricity system

The new coalition has correctly determined that the previously assumed electricity demand forecasts for 2030 are too low and has revised them upwards to 680-750 TWh. Linked to this, it is aiming for a very ambitious renewables target to cover 80% of electricity demand by 2030. The proposal for an EU-ETS minimum price of 60 EUR/t CO2 serves as a safeguard for an accelerated coal phase-out and would contribute to lowering financing costs for renewables.

Further, the coalition wants to phase out the EEG in the future, such that no further subsidies will be provided to new renewable energy generation plants from the point that coal is completely phased. With PPAs, there is political support for an instrument that paves the way for a market-based expansion of renewables. In view of the scarcity of space, the coalition’s promotion of innovative hybrid-use technologies such as agri- and floating PV is also expedient.

The proposal for the abolition of the EEG levy is an important development, and has been long overdue. The abolition will strengthen the acceptance of the energy transition through lower consumer electricity prices and at the same time eliminate competitive disadvantages for renewable electricity as a key energy source for climate neutrality.

Next steps

In addition to the challenging implementation of accelerated planning and approval procedures as a basic pre-requisite for actually installing the increased tender volumes, the coalition must also present a clear roadmap with concrete instruments in order to exit EEG subsidies and enter into market-based renewable expansion without state support with PPAs, and by securing higher tender volumes for dual-use technologies for generating electricity.

III. Innovation and transformation

Our study, “Reality Check of the National Hydrogen Strategy” (available in German) shows that the German government’s current hydrogen strategy is not yet sufficient to stimulate the ramp-up of the hydrogen economy. The coalition agreement captures the importance and potential of a rapid and pragmatic transformation, and does not exclude “blue” and “turquoise” hydrogen as bridging technologies towards a green hydrogen economy.

The proposed Carbon Contracts for Difference (CCfDs) are a necessary intermediate step to accelerate the ramp-up towards this goal. To avoid path dependencies and maintain innovation incentives, a market-oriented, sector-specific design will be crucial. In order to ensure the achievement of German climate targets, CCfDs should be launched as soon as possible to provide companies with investment security in the transformation process.

Although the potential of digitalisation is generally recognised in the coalition agreement, it does not find adequate mention in the specific context of the chapter on climate policy, even though a different chapter recognises the importance of innovation and digitalisation in the buildings sector, and contains the proposal to introduce a digital resource passport in the buildings sector.

However, the potential of digitalisation for implementing various aspects of climate policy has not been recognised, for example in the proposed implementation of the Europe-wide trade in guarantees of origin for green electricity and the potential certification of the carbon footprint of hydrogen and derived products.

Next steps

In addition to the measures for an accelerated, pragmatic ramp-up of the hydrogen economy, the new German government should develop a stronger focus on the use of digital innovations to achieve climate neutrality. A carbon certification system for hydrogen should be established digitally from the outset in order to make the carbon footprint across sectors transparent, traceable, and verifiable. This can start with hydrogen and then be extended to downstream products such as steel, and finally to end products. An eventual interlinking with the European digital product passport mentioned in the coalition agreement can be further explored. For green electricity, there is a need for digitalisation not only in the context of European trade, but also for greater temporal differentiation of guarantees of origin.

Our “Action Programme on Climate and Energy Policy for the New Legislative Period” (available in German) provides a comprehensive overview of measures proposed by us for the next legislative period, some of which find reference in the Coalition Agreement, as well as other measures.