How Germany aims to get to net zero without breaking the bank
20/07/2024
Germany faces a tough time finding ways to pay for its efforts to become climate-neutral by 2045 given the country’s current tight budget constraints.
The German cabinet passed its 2025 budget on Wednesday after months of wrangling, but this left a 17 billion euro ($18.58 billion) gap between projected spending and revenue still to be covered.
Such funding shortfalls will make the costly task of shifting industries and agriculture to low or zero emissions more difficult and could undermine some of the coalition government’s energy projects.
The costs of the energy transition, including electrification, carbon sequestration and renewable hydrogen, are difficult to calculate but will run into the low trillions of euros.
The Berlin government has to be able to demonstrate how the cost can be shared fairly between the public at large and energy customers, while also seeking to attract private investment.
Here is an overview of government instruments so far:
CO2 pricing and ETS
Carbon dioxide emissions pricing and mandatory trading in CO2 pollution permits, introduced in the European Union in 2005, has worked and is still considered one of the most effective mechanisms to encourage reductions in emissions.
It spans power plants, industries and airline operators. Participants are allocated, or must buy, certificates which they can sell if they have surplus carbon permits.
EU states receive money from the sale of the permits. Germany received around 18 billion euros in 2023 for its Climate and Transformation Fund, which is designed to fund other decarbonisation measures.
Fuel tax
This national tax in Germany has been levied on heat and transport since 2021 on fuels like heating oil and diesel to cover sectors not subject to the carbon permit scheme. It is designed to encourage switching to electric cars or heat pumps.
The original plan was to pay people a climate rebate to soften the impact of the tax on low-income households or people who rent and have no influence over the energy efficiency of their buildings. But this has not happened due to budget constraints.
Renewable energy law
A renewable energy surcharge, introduced in 2000 to promote green power through feed-in tariffs paid to solar and wind generation plant operators, has been instrumental in the provision of enough capacity for Germany to derive over 50% of power production from zero-carbon production facilities.
Consumers had to pay towards the surcharge in their bills. But because of its high cost, it was waived in the second half of 2022 and fully abolished as of 2023. Currently the country’s general budget bears the cost.
This means that in 2024, for example, more than 20 billion euros flows to power transport grid operators so that they can pay green power producers fixed prices when the grids receive their output which gets priority on the grid.
Electricity price levies
Germany also has imposed additional levies on the power price to help pay for renewable energy. These includes offshore wind connection fees, network usage fees, and relief for big customers from pro rata fees spread among the rest. The government is also considering a new levy to help with the construction of new gas-fired, but hydrogen-ready, power plants.
Grid fees
Fees for using the electricity network make up around 20% of people’s bills in Germany and these will increase to reflect the cost of improvements to the grid needed to transport big volumes of renewables. The total cost is likely to run into several hundred billions of euros by 2045.
Spreading the cost of a hydrogen transport grid
Economy Minister Robert Habeck is backing a system to spread the costs of a clean hydrogen transport grid over future generations.
Under this plan, the state would pay into an “amortisation account” for the construction of the infrastructure and recover that over the long-term.
Climate protection agreements
Climate protection agreements, also known as carbon contracts for difference, grant subsidies to companies for initially expensive, alternative fuels, which they apply for at tenders.
The companies repay the subsidies to the state once operating costs fall as the alternative technology becomes more efficient.
Boosting renewables post-payment guarantees
The government wants to replace the 20-year payment guarantees under the old renewable energy law, because consumers can no longer foot the bill for generous hand-outs to producers.
The aim is to operate with price caps instead to reduce the burden on the country’s general budget, while holding on to expansion plans.
Reporting by Markus Wacket, writing by Vera Eckert, editing by Jane Merriman
