Germany Shows the World How to Green the Stimulus

Source: By Akshat Rathi, Bloomberg • Posted: Tuesday, June 16, 2020

Ambitious recovery plans give Germany a headstart. Will others join the race?

During the 2008-09 financial crisis, about 15% of the stimulus money injected into the global economy went to green initiatives. Earlier this month, Germany committed 130 billion euros ($145 billion) to pandemic recovery, with about 30% to be spent on activities that will cut emissions. What changed?

One simple answer is that we are learning from past mistakes. After the financial crisis governments provided fiscal stimulus with the primary objective of getting out of the crash. It worked, but Europe in particular later became mired in stagnation.

“This time there’s one big opportunity and one big enabler,” says Brian O’Callaghan, a researcher at the University of Oxford who specializes in renewable energy and finance. The opportunity is to build competitive advantage in new industries; the enabler is cheap debt. That has allowed fiscally conservative Germany not just to cut taxes and provide loans to struggling businesses, but also to increase subsidies for electric cars and to fund a world-leading program for clean hydrogen.

“We have broadened our perspective on the role that stimulus plays,” says O’Callaghan. “The decision on what policies to support shouldn’t be purely based on deep economic analysis, but it should also take into account future trajectories and needs.”

Green Transition

A third of Germany’s virus recovery plan could help lower emissions

Source: Bloomberg

Note: Others include research, forestry, shipping, air transport and agriculture

Spending 5.6 billion euros on electric cars makes sense. Germany’s famed Mittelstand—a constellation of small- and medium-sized businesses—relies heavily on the demand generated by the country’s auto giants. Government spending will help speed the sector’s transition to a cleaner and better form of transport, generating opportunities throughout the supply chain. Volkswagen and Daimler have already committed billions of euros to the task.

The hydrogen bet—investing as much as 9 billion euros—is less obvious. Burning hydrogen produces only water, and it doesn’t have a greenhouse-gas impact if produced from renewable energy or with carbon capture. The fuel could, for example, help decarbonize steel manufacturing, which doesn’t have a technologically viable alternative to cut emissions.

But “near term, hydrogen won’t employ as many workers as mature industries that are ready to scale up quickly,” says Ryan Hanna, researcher at the University of California at San Diego, noting that stimulus spending looks to typically maximize job creation quickly. “Longer term, however, it could.”

Germany’s commitment to spend billions, along with other partners in the European Union, promises to “make Europe the leader in low-carbon hydrogen production over the coming decade,” according to BloombergNEF. Crucially, both Germany and the EU are looking to lock in policies that provide a stable revenue for hydrogen production regardless of swings in carbon prices. These policies would enable the continent to attract money from the private sector both domestically and internationally—multiplying its own investment many times over.

The country doesn’t get everything right. Germany has pulled support for zero-carbon nuclear power and paid the price by having to burn coal instead. Even if building new nuclear plants is becoming an economically unviable proposition, “keeping the existing fleet of nuclear reactors open would protect tens of thousands of high-paying, highly skilled jobs,” Hanna and his colleagues recently wrote in Nature.

That said, most experts agree that Germany has largely got its stimulus right. It is able to spend stimulus money on green goals not just because that makes economic sense, but also because there is a large political majority across the left-right spectrum in favor of climate action. That’s true of most European countries, which in the next few weeks will announce different shades of green stimulus plans of their own.

The bigger challenge now is to get the rest of the world on its side. “Leadership is great, but followership is what really matters for the climate,” writes David Victor, professor of international relations at the University of California at San Diego, in Yale Environment 360. “A hyper-green Europe will have little impact on the climate unless the better technology and business practices nurtured at home can spread widely to the places that cause most emissions.”