Germany Just Unveiled the World’s Greenest Stimulus Plan

Source: By Laura Millan Lombrana, Bloomberg • Posted: Sunday, June 7, 2020

The plan unveiled late on Wednesday after 21 hours of intense negotiations is the most ambitious yet by any government to support green initiatives. Divided into 57 different points addressing sectors from taxes to families to agriculture, the budget allocates about 41 billion euros to areas like public transport, electric vehicles and renewable energy, according to calculations by Bloomberg News.

GERMANY-POLITICS-HEALTH-VIRUS-BUDGET

Chancellor Angela Merkel announces the recovery budget in Berlin, on June 3, 2020. Photographer: John MacDougall/AFP via Getty Images

The accord is also notable for what it omits. Unlike in the aftermath of the financial crisis, when the powerful automotive sector received financial aid in the form of purchase incentives, no money was allocated to combustion-engine vehicles this time. Instead, buyers of battery-powered cars stand to benefit from bigger subsidies, highlighting the change in priorities in Europe’s automotive heartland.

“Governments are sensibly addressing this problem in phases,” said Cameron Hepburn, professor of environmental economics at the University of Oxford. “Phase 1 was rescue, which is largely colorless. This is the beginning of Phase 2, and we’re starting to see how green and not green the responses are going to be.”

Balancing Act

Germany, which is aggressively pushing renewable energy as it phases out nuclear power plants, is seeking to strike a balance between getting the economy back on its feet after weeks of lockdown and propelling the country toward a greener future. It’s a difficult act given the role that energy-intensive manufacturing and the car industry still play for the workforce and exports.

Until now, governments of the world’s largest 50 economies have committed about $18 billion of their coronavirus measures to stimulate low-carbon elements of the economy, such as energy-efficient buildings and sustainable farming, according to data compiled by Bloomberg prior to Germany’s announcement. That amounts to less than 0.2% of the nearly $12 trillion that these economies are planning to spend on the recovery so far.

Germany’s package, when adjusted for the size of its economy, is half the $800 billion the U.S. government spent on economic stimulus after the 2008 financial crisis. About $90 billion of the U.S. spending at the time went to green initiatives that established solar and wind energy in the country and helped Tesla Inc. become the world’s second-largest automaker by market value.

Friendly Words

But Germany’s green spending as a proportion of the total package is almost three times higher than the U.S.’s a decade ago. As a result, the plan won praise from observers with high climate standards. Germany’s Green Party leader Annalena Baerbock called it “better than feared” and Greenpeace Germany executive director Martin Kaiser saying he was “pleasantly surprised.”

“The magnitude of money is still too little to kick-start the transformation needed to meet the goals set under the Paris climate agreement,” Kaiser said. “But it’s a clear indication that society is going green.”

Still, the initiatives also drew criticism mainly from opposition parties for being fragmented and lacking vision. The reduction in VAT, in particular, risks creating a purchase incentive for combustion-engine cars because their sticker price will come down marginally, too. And the 2.5 billion euros in funds allocated to public transport and the 5 billion euros for the Deutsche Bahn national railway are directed more at propping up distressed operations than reshaping the future of mass transit.

“If you try to achieve the two important political goals of economic recovery and climate protection with the same instrument, you will achieve suboptimal results with both,” said Gabriel Felbermayr, president at the Kiel Institute of World Economy, a leading research center in Germany.

While the package includes a 1 billion-euro investment to help aircraft cut carbon dioxide emissions by 30%, the government’s 9 billion-euro bailout of Deutsche Lufthansa AG, announced last month had no green strings attached.

Power Prices

The single largest green measure is an overhaul of the way Germany has financed its switch to green power, which so far relied on mandatory surcharges that were added to consumers’ electricity bills. At a cost of some 11 billion euros, the government will step in and cut retail-power costs by two euro cents for every kilowatt-hour consumed, which in turn will help drive down the green surcharge for consumers.

The initiative potentially cuts both ways. While it alleviates the burden on consumers weighed down by Europe’s highest electricity prices, cheaper power could in turn lead to higher consumption and more emissions, said Hepburn, the Oxford academic.

The government also wants to boost research and commercial development of green hydrogen, key to reducing the carbon footprint of high-emitting industries such as steel that can’t operate on renewable energy only. The German plan envisions investing 9 billion euros through 2040 to build 15 gigawatts of clean hydrogen capacity.

Green hydrogen, in which renewable energy is used to produce hydrogen by splitting water, is not a yet a commercially viable solution. But its inclusion in the plan is a nod to the more visionary aspiration of the budget, coming with the proclamation to make Germany the “world’s supplier of the technology”.

No Help

“It is a very environment-conscious stimulus package, as it should be,” Uniper SE Chief Executive Officer Andreas Schierenbeck said by email. “Hydrogen is an essential element of the low emissions energy-mix of the future.”

Arguably the most contentious point in the plan was the support for the car industry. In the end, the government settled on doubling incentives for fully-electric and hybrid cars, overruling calls by German automakers as well as some politicians who proposed including support for combustion-engine vehicles as well.

A combined 8 billion euros will go to promoting supply and demand of electric vehicles. At 9,000 euros per car, Germany’s support for EVs will be the most generous across Europe. Though the highest subsidy is limited to EVs costing less than 40,000 euros — which means excluding some luxury cars made by the likes of BMW, Mercedes, Audi and Tesla — BloombergNEF analyst Aleksandra O’Donovan projects that it could boost the country’s EV sales in 2020 by as much as 23% compared to last year.

Ships, Planes

The stronger environmental focus limits the direct economic effect because electric and hybrid cars still account for only a small part of the German car market, said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler.

“The stimulus package offers less direct support for the auto industry than expected,” Pieper said.

Some funds will also go to help agriculture and livestock farmers transition toward more climate-friendly models, sustainable management of forests and initiatives to lower emissions from shipping and air transport.

“There is a lot of uncertainty about how deep and how long this recession is going to be –you don’t want to go too hard too fast, but you also don’t want to underplay it,” Hepburn said. “We have prioritized efficiency ahead of resilience in many economic systems, so what’s happening is a warning, especially in relation to climate change.”

— With assistance by Vanessa Dezem, Brian Parkin, and Christoph Rauwald