OECD Environmental Performance Reviews: Germany 2023

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OECD Environmental Performance Reviews

8 May 2023

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1. Towards sustainable development

Abstract

This chapter provides an overview of Germany’s green energy transition, the impact of the global energy crisis, key environmental trends and progress towards net zero. It assesses the environmental effectiveness and economic efficiency of the environmental policy mix, including regulatory and voluntary instruments; fiscal and economic instruments; and public and private investment in environment-related infrastructure. Finally, it examines the interaction between the environment and other policy areas with a view to highlighting opportunities and barriers to environmentally friendly and socially inclusive growth.

1.1. Addressing key environmental challenges

Germany continued to improve its environmental performance over the past decade. Despite its important industry base and dense population, the country reduced several environmental pressures. Germany improved air quality and is one of the best performing countries in terms of sustainable waste management in Europe. It is working towards a more circular economy and more sustainable supply chains. It has decoupled economic growth from total energy supply and carbon dioxide (CO₂) emissions generated by fuel combustion. However, the country’s energy mix still depends largely on fossil fuels, which accounted for about three-quarters of total energy supply in 2020. Germany has an ambitious climate policy and aims to reach climate neutrality by 2045 and achieve negative emissions after 2050.

Despite progress, the country faces multiple pressures on nature and water, threatening biodiversity and natural capital. Nitrate water pollution from agriculture remains a serious concern. The Baltic Sea and North Sea face acute problems with eutrophication. Many German water bodies failed to meet environmental objectives. Germany needs to strengthen efforts to improve water quality. Only about one-third of Germany’s forests have near-natural conditions and more than 90% of peatlands have been drained (BMUV, 2022[1]). The conservation status of species and habitats shows deteriorating trends. The impacts of climate change increasingly affect the country as demonstrated by the 2021 flood catastrophe. Germany is scaling up efforts to adapt and become more climate resilient (Chapter 2).

The economic downturn caused by the COVID-19 pandemic hit the economy hard, with gross domestic product (GDP) contracting by 3.7% in 2020. The economy recovered in 2021 (+2.6%) and was then again affected by the economic consequences of Russia’s unprovoked war of aggression in Ukraine, which resulted in a lower-than-expected real GDP growth of 1.9%. It is projected to recover slowly (0.3% in 2023 and 1.7% in 2024) (OECD, 2023[2]). In 2022, Germany recorded a high inflation rate of 8.8%. The crisis revealed structural weaknesses in Germany’s energy supply due to strong dependency on Russian oil and gas, obliging the federal government to rethink its energy strategy. However, the German economy has weathered the global energy crisis much better than expected (OECD, forthcoming[3]). As part of its energy crisis response, Germany has taken a series of measures, which are historic in size and scope. They are set to massively accelerate the green energy transition in the coming years.

1.1.1. Progress towards sustainable development goals

Germany ranked 6^th of 163 assessed countries on the implementation of the 2030 Agenda for Sustainable Development (Sachs, J.D. et al., 2022[4]). The country has made progress in implementing the Sustainable Development Goals (SDGs) but faces many challenges, particularly related to SDG12 on responsible consumption and production, and SDG13 on climate action (Figure 1.1).

Germany has a high political commitment to support implementation of Agenda 2030 at home and abroad. In 2016, Germany incorporated the SDGs in the German Sustainable Development Strategy, including environmental indicators. The updated Sustainability Strategy of 2021 identifies six cross-cutting transformative areas, including climate action. It is one of few countries, which achieved the international target of dedicating 0.7% of gross national income to official development assistance (Section 2.4.3).

Under the co‑ordination of the Federal Chancellery, Germany applies a whole-of-government approach to support implementation of Agenda 2030. Every draft regulation or law requires the ministries to conduct an ex ante sustainability impact assessment (Federal Government, 2021[5]). Moreover, 11 Länder have adopted their own sustainable development strategies. Germany was one of the first countries to prepare Voluntary National Reviews within the broader Agenda 2030 process (2016 and 2021). Some Voluntary Local Reviews have also been elaborated. The 2022 Spending Review lays the groundwork to increase the focus on performance-based budgeting for sustainable development, which the government intends to develop in the coming years under the leadership of the Ministry of Finance (Section 1.3.5).

Figure 1.1. Germany is making progress in implementing Agenda 2030, but challenges remain

1.1.2. Green energy transition

Initiated in the early 2010s, Germany’s green energy transition (Energiewende) aims at moving away from nuclear and fossil fuels towards renewables while promoting better energy efficiency. The transition is underway: Germany has decoupled economic growth from energy demand and CO₂ emissions, and is one of the G20 and EU-27 countries with the highest levels of energy efficiency (Brüggemann, 2018[6]). The share of renewables has achieved remarkable growth over the past decade. The coal phase-out has been enshrined in the 2020 Act on the Phase-out of Coal-fired Power Plants. This contains a legally binding commitment for phasing out coal by 2038 at the latest, including targeted support to coal regions for the transition. In addition, the federal government committed to accelerating the process and completing the coal exit, ideally, by 2030. The three remaining nuclear power plants went off the grid in mid-April 2023, completing Germany’s decade-long nuclear exit (Box 1.2).

Despite progress, Germany will need to advance its energy transition at a much faster pace to secure a future that is “secure, environmentally friendly and economically successful” (BMWK, 2022[7]). More particularly, it needs to address three major challenges: i) ensuring energy security; ii) achieving national climate goals; and iii) developing the country’s economic competitiveness. Supply security has become a top priority of the government since the Russian invasion of Ukraine and the subsequent global energy crisis. Climate change is an overall leitmotif of the federal government’s coalition treaty; and rising economic competitiveness is at the heart of the country’s industry policy. However, Germany needs to find ways to advance the country’s structural transformation by addressing the triple crisis of energy, climate and biodiversity in an integrated way.

In practice, Germany faces several trade-offs. For example, emergency measures aimed at tackling energy price shocks and preventing gas supply shortage partly impede progress on climate and environmental goals (e.g. re-opening of coal energy plants; fuel price cuts; suspended 2023 increase of CO₂price for transport and buildings). While emergency measures are needed to ensure supply security and system stability, some of the government’s responses to the energy price shocks have reduced the impact of national climate policies. Given the pressing environmental and climate challenges, the country cannot afford any further delays in designing pathways towards a sustainable energy transition.

Reducing energy use

Improving energy efficiency has been a key pillar of the Energiewende. Germany has decoupled economic growth from energy demand and CO₂ emissions. Total energy supply and final energy consumption are both decreasing while GDP has been growing (until COVID-19, Figure 1.2). In line with the OECD average, this resulted in a further decline in energy intensity. Energy use declined sharply in 2020 due to the pandemic and is expected to rebound in the coming years.

Figure 1.2. Germany has decoupled economic growth from energy demand and CO₂ emissions

The global energy crisis triggers an opportunity to advance energy efficiency. Energy savings of firms and households have been considerable: gas use in January 2023 was about 23% below the 2018-21 average (OECD, forthcoming[3]). Reducing energy consumption through technical improvements and behavioural measures is more critical than ever to help avoid mismatches between demand and supply (IEA, 2022[8]). To secure the supply of heat during the cold weather periods in 2023 and 2024, the federal government introduced additional energy saving measures on the basis of the Energy Security of Supply Act (Energiesicherungsgesetz, EnSiG) in August 2022.

Over the past decade, Germany significantly enhanced energy efficiency in the commercial, public services and residential sectors. Private households reduced their energy consumption by over 10%, mainly thanks to technological improvements (Figure 1.2). Some energy savings were also made in the transport sector. Meanwhile, energy consumption in the industry sector remained stable, which can be partially explained by increased energy consumption in the chemical industry. As a result, total final energy consumption decreased by 7.7% since 2005, above the OECD average of 6.7% (IEA, 2021[9]).

Figure 1.3. Germany has set ambitious energy saving targets

Germany did not meet its 2020 efficiency target of cutting primary energy usage by 20% relative to the 2008 level (Figure 1.3). However, it only narrowly missed the mark thanks to a sharp consumption drop in 2020 related to COVID-19. Technical efficiency gains were offset by rising energy demand (e.g. economic growth, higher traffic volume, changes in lifestyle and consumption patterns). More efforts will be needed to sustainably reduce energy consumption in absolute terms to meet Germany’s national climate and energy targets. To close the energy savings gap, new measures need to focus on current bottlenecks such as the renovation of building stock (Section 1.3.2). The electrification of the transport sector will also greatly contribute to efficiency gains.

The federal government has set itself the goal of “making Germany the most energy-efficient economy in the world” (BMWK, 2020[10]). Germany’s Energy Efficiency Strategy 2050 sets out a long-term pathway for strengthening German energy efficiency policy (BMWK, 2020[10]). Ambition was further raised with a new goal of reducing energy consumption by 30% in 2030 and by 50% in 2050, compared to 2008 levels. The national strategy includes primary and final energy targets, and is supported by a nationwide dialogue process. Targets should be compatible with national climate goals and will need to be adjusted to the revised EU Energy Efficiency Directive. The federal government advanced work on a national Energy Efficiency Law in parallel to the now concluded EU process. Many measures and instruments under the National Energy Efficiency Action Plan (NAPE 2.0) contribute to cutting CO₂ emissions, including private sector networks (Box 1.1).

Box 1.1. Policies in practice: Energy efficiency and climate action networks

Building on a Swiss initiative, Germany has developed a network approach to promote systematic information-sharing and mutual learning on energy efficiency and climate action in a simple and non-bureaucratic way. A network (Effizienznetzwerk) typically brings together 8-15 businesses, which set joint energy and climate targets and work together towards achieving them.

To date, more than 350 energy efficiency networks bring together industry, trade and skilled crafts from over 3 000 companies across the country. This is fewer than the 500 networks announced for 2020 in 2014. However, these networks have been instrumental in working together towards achieving joint energy and climate targets. By 2025, some 300-350 networks shall work together towards saving 9-11 terawatt hours, as well as 5-6 million tonnes of CO₂-eq emissions.

Many networks outperformed initial goals and its members benefit from experience from other companies and greater visibility, making changes more socially acceptable. The initiative compiled a series of success stories from various sectors across the country. Other countries are now developing similar initiatives.

Source: Effizienznetzwerke: www.effizienznetzwerke.org.

Mandatory measures, such as energy audits or energy management schemes, will apply to businesses. Data centres will be required to re-use 40% of their waste heat. The federal government provides EUR 1 billion for energy-efficient measures, including for digital modernisation across its public administration and within companies. Public authorities at all government levels are required to participate more strongly in saving energy according to their respective size. Households receive energy saving tips through an information campaign called “80 million together for energy change”.

The systematic approach of introducing energy-saving measures at all levels goes in the right direction and will help Germany reduce energy losses while reducing reliance on fossil fuels. However, more targeted support will be needed to promote system change such as helping vulnerable households to replace natural gas heating systems and gas boilers with climate-friendly alternatives (Section 1.3.2). Germany could also harness behaviour-related efficiency potential to a much greater extent (e.g. incentives for shared mobility, reduced heating temperatures in buildings) (ERK, 2022[11]).

Decarbonising the energy mix and the nuclear exit

Despite massive investments in renewables, Germany’s energy mix remains dominated heavily by fossil fuels, representing about three-quarters of total energy supply (Figure 1.4). This is about the same share as a decade ago. Oil and gas remain the main sources of Germany’s total energy supply. The expansion of renewables mainly contributed to fill the gap created by advancing the nuclear power phase-out (Box 1.2). As a result, Germany will need to expand renewables at a much broader scale to further decarbonise its energy mix (Box 1.3).

Figure 1.4. Total energy supply remains carbon intensive despite increases in renewables

Box 1.2. Germany’s nuclear exit

Germany’s energy transition places great emphasis on phasing out nuclear power by 2022, as stipulated in an amendment to the Atomic Energy Act. The decision in 2011 following the Fukushima Daiichi nuclear power plant accident in Japan. The nuclear exit has received widespread public support and political consensus to some degree. However, Germany's nuclear phase-out has been and will continue to be debated in light of energy supply and security challenges. For instance, in response to the global energy crisis, the federal government temporarily extended operations of the three remaining nuclear power reactors (Isar 2, Neckarwestheim 2 and Emsland) to offset reduced gas supply from the Russian Federation. The three plants were shut down in mid-April 2023, effectively completing Germany's decade-long nuclear phase-out.

Germany will still need to deal with a sizeable amount of nuclear waste. The country has licensed the former Konrad mine in Salzgitter in the state of Lower Saxony as a repository for low- and intermediate-level waste from the spent nuclear fuel of its past nuclear programme. The site is scheduled to start operations in 2027. For high-level waste, Germany is seeking a final repository since the Gorleben salt dome was ruled out as a potential site.

Phasing out of nuclear energy leaves Germany the challenge of ensuring a stable and reliable, low-carbon energy supply in both the short and long term. Without more reliance on fossil fuels, the country’s shift towards renewable energy sources such as wind and solar power will pose significant challenges for the stability and security of the power grid.

Germany’s nuclear phase-out takes place in a changing context for nuclear energy worldwide. Several countries continue to invest in the expansion of nuclear power. For example, Japan recently moved to promote use of nuclear energy to achieve net zero by 2050. It intends to restart as many reactors as possible and extend the lifespan of existing reactors beyond 60 years. Similarly, in February 2023, 11 countries of the European Union (Bulgaria, Croatia, the Czech Republic, Hungary, Finland, France, the Netherlands, Poland, Romania, Slovakia and Slovenia) launched a nuclear alliance. They aim to promote nuclear energy as an important tool for achieving net-zero objectives in the European Union. In 2022, France committed to building at least six large reactors.

Source: NEA (2023), www.oecd-nea.org.

Energy security

Germany relies heavily on fossil fuel imports, which represent more than 60% of its total energy supply, slightly above the European average (Figure 1.5). The country completely depends on imports for critical minerals and metals for development of renewable energy sources. This makes it vulnerable to economic fluctuations and geopolitical issues (Box 1.10). At the crossroads of European energy infrastructure, Germany advocates for common European solutions to address the European-wide energy crisis. It would greatly benefit from deeper integration of the European market.

The Russian invasion of Ukraine on 24 February 2022 and the successive global energy crisis obliged the German government to rethink its energy strategy. The energy crisis revealed structural weaknesses of Germany’s energy supply due to strong dependency on Russian oil and gas. The country’s past energy policy has been criticised for being “short-sighted” because it underestimated the supply security risks related to the geopolitical realities of its policy on the Russian Federation.

However, the federal government has quickly adjusted to new realities by diversifying its supply sources to ensure security of supply (Box 1.3). Measures include filling up gas storage tanks (with the highest storage obligations in the EU), negotiating liquefied natural gas (LNG) trade deals, temporarily re-opening coal plants and raising public awareness on energy saving. Gas storages had been fully filled in October 2022 and stood at 77% in early February 2023, thanks notably to a relatively mild winter (OECD, forthcoming[3]). Direct imports from Russia to Germany through Nord Stream 1 and 2 gas pipelines have stopped.

Figure 1.5. Germany depends heavily on imported fossil fuels

Box 1.3. Moving away from fossil fuels

Reducing oil dependency

Oil remains Germany’s most important primary energy source covering nearly a third of the country’s energy mix (IEA, 2023[12]) The country has almost no domestic oil production and depends heavily on imports. Prior to its war in Ukraine, the Russian Federation delivered most of Germany’s oil supply via the Druzhba pipeline. Overall, the oil market is more globalised than the gas market and it is thus easier to diversify supply sources. Germany will need to further enlarge the range of oil suppliers while reducing demand through transport electrification, alternative fuels and energy efficiency measures.

Alternative gas supplies – Liquefied natural gas

Gas represents about a quarter of Germany’s energy mix and is the second most-consumed energy source after oil. Over 90% of gas is used in Germany’s heating sector. About 44% of private households use gas to heat their homes (BMWK, 2023[13]). In response to the energy crisis, the federal government adopted legislation to ensure minimum levels of gas in storage. It commissioned two public LNG terminals that were built within less than a year; in total, six LNG terminals should be operational by winter 2023-24 (LNG Acceleration Act). The total import capacity of these units represents about one-third of previous gas imports from the Russian Federation. While Germany should be commended for acting swiftly, the rapid construction of terminals came at a price (EUR 6.6 billion), more than twice as much as initially scheduled. Against the backdrop of Germany’s energy transition, there is a risk of stranded assets. The federal government should therefore carefully assess import needs to avoid overcapacity. It should also lead a transparent discussion on costs, conditions and length of contracts. This would ensure that Germany implements this emergency response in a manner consistent with its climate objectives and without creating lock-in effects (G7, 2022[14]). The LNG Acceleration Act underlined that LNG infrastructure use beyond 2043 should be allowed only for facilities that produce climate-neutral hydrogen and its derivatives.

Coal phase-out

Germany has a legally binding goal for coal phase-out by 2038 at the latest. In response to the energy crisis, the federal government agreed on a temporary market return of 10.4 gigawatts of hard coal, lignite and oil-fired reserve capacity. Two lignite power plants of RWE, Germany’s biggest power producer, will remain on the market until March 2024, 15 months longer than originally scheduled. This will contribute to increasing the country’s CO₂ emissions in the short term. In turn, the federal government brought forward the lignite phase-out in the western coal mining area of the state of North Rhine-Westphalia to 2030 – eight years ahead of the national commitment of 2038. This partly delivers on the coalition treaty’s promise to accelerate the phase-out of coal and achieve it “ideally” by 2030. According to government sources, the early anticipation of coal phase-out in this area would contribute to saving 280 million tonnes of CO₂. Coal remains, however, a major source of electricity generation in Germany. The country is one of the world’s biggest coal users, with the largest per capita consumption. Germany’s coal phase-out also has major social impacts on employment (OECD, forthcoming[3]).

Expansion of renewables

While the share of renewables in total energy supply remains modest (17%) (Figure 1.6), Germany has achieved remarkable growth in renewable electricity over the past decade; it represented 41% of electricity outputs in 2021 (Figure 1.7). To date, bioenergy still represents the largest part of renewables in total energy supply. Solar energy has been boosted across the country since the early 2010s. Wind energy has nearly tripled since 2010. Germany has the biggest wind onshore capacity in Europe. The total installed capacity was 57 gigawatts (GW) onshore and 7.8 GW offshore in 2022. The federal government aims to double wind onshore capacity to 115 GW and reach a 30 GW offshore wind target in 2030 (Table 1.1). The renewable energy forecasts for 2022-27 are optimistic, projecting major increases in solar photovoltaic and onshore wind (IEA, 2022[15]).

Figure 1.6. Germany’s share of renewables has been growing and is above the OECD average

The Easter Package 2022 lays out ambitious targets and makes significant changes to the country’s regulatory framework. This includes measures to introduce higher auction volumes and accelerate lengthy and complex permitting procedures, a major barrier for onshore wind development. The 2023 Renewable Energy Sources Act (EEG 2023) sets a new legally binding target to increase the share of renewable energy sources to 80% of electricity consumption by 2030 (previously at 65%). In addition, the share of renewables should reach 30% of gross final energy consumption, 50% of heating, and 30% of transport (Figure 1.7). The Federal Ministry for Economic Affairs and Climate Action is working on measures to accelerate the decarbonisation of heating and cooling, aiming to increase the share of carbon-neutral heating to 50% by 2030 (NAPE 2.0).

Figure 1.7. Germany has set ambitious targets for renewables

Source	Target for production capacity	Measures
Onshore wind	Current: 57 GW in 2022 Target: 115 GW in 2030 Technical feasibility: 165 GW, if 2% of surface areas is used.	Revised law on spatial planning: at least 2% of the country’s surface area must be dedicated to onshore wind; to date, 1% of surface area is developed and only 0.5% in use. Specific targets at Länder level: 1.4% of respective surface areas by 2027 (0.25% for city states) 1.8-2.2% depending on respective Länder targets must be reached by 2032 (0.5% for city states). New distance rules between wind turbines and to military areas. Streamlined compliance with environmental laws. Financial benefits from wind parks are shared with local communities.
Offshore wind	Current: 7.8 GW in 2022 Targets: > 30 GW in 2030 > 40 GW in 2035 > 70 GW in 2045	Increase in the volumes up for auction. Streamlined environmental assessments and participation process. More rapid clearance of offshore grid connections within spatial development plans.
Solar PV installations	Current: 60 GW in 2021 Target: 215 GW in 2030	Citizen-led energy initiatives are exempt from the tender scheme. Mandatory installation of solar roofs for all new residential buildings in some federal states (e.g. Baden-Württemberg); financial benefits from ground-mounted solar PV are shared with local communities.

Source

Target for production capacity

Measures

Onshore wind

Current: 57 GW in 2022

Target: 115 GW in 2030

Technical feasibility: 165 GW, if 2% of surface areas is used.

Revised law on spatial planning: at least 2% of the country’s surface area must be dedicated to onshore wind; to date, 1% of surface area is developed and only 0.5% in use.

Specific targets at Länder level:

1.4% of respective surface areas by 2027 (0.25% for city states)
1.8-2.2% depending on respective Länder targets must be reached by 2032 (0.5% for city states).

New distance rules between wind turbines and to military areas. Streamlined compliance with environmental laws.

Financial benefits from wind parks are shared with local communities.

Offshore wind

Current: 7.8 GW in 2022

Targets:

> 30 GW in 2030

> 40 GW in 2035

> 70 GW in 2045

Increase in the volumes up for auction.

Streamlined environmental assessments and participation process.

More rapid clearance of offshore grid connections within spatial development plans.

Solar PV installations

Current: 60 GW in 2021

Target: 215 GW in 2030

Citizen-led energy initiatives are exempt from the tender scheme.

Mandatory installation of solar roofs for all new residential buildings in some federal states (e.g. Baden-Württemberg); financial benefits from ground-mounted solar PV are shared with local communities.

Source: Easter Package (2022) and draft laws.

These are ambitious goals. In addition to doubling use of green electricity, Germany must also respond to rising electricity demand due to the ongoing electrification of the transport and building sectors. The development of renewable energy becomes an “overriding matter of public interest” (BMWK, 2022[16]). This means that renewable energy will be given priority in decisions. In parallel, the federal government will need to address bottlenecks related to the electricity grid, the skills gap and supply chain risks.

Building a climate-neutral electricity grid

Reaching the renewable energy targets will require massive investment in the modernisation and expansion of electricity grids and energy infrastructure. Some EUR 32 billion and EUR 110 billion would be needed by 2030 and 2050, respectively, to expand and modernise Germany’s electricity grid (E.ON, 2020[17]). Without substantive long-term investment, Germany will face blockages related to overloaded networks that can no longer absorb electricity from renewable energy sources. Grid-stabilising costs could triple from EUR 1.4 billion in 2017 to EUR 4.2 billion per year by 2050 (E.ON, 2020[17]).

Building a climate-neutral electricity grid is complex, given the large and growing number of small, decentralised power plants and new needs related to e-mobility and climate-friendly heating systems. A spatially more equally distributed deployment of onshore wind power would help ease pressure on the power grid by favouring local usage. Digitalisation (e.g. smart meters) will also play a key role in better managing electricity flows over time and space.

The 2019 Grid Expansion Acceleration Act set targets, including connections to channel energy surpluses from wind power in the north to the major power consumption regions in the west and south. However, progress has been slow, mainly due to complex planning and approval procedures. According to the Federal Network Agency, less than 2 000 kilometres (km) of the planned 12 250 km length of priority grid expansion projects were operational at the third quarter of 2021. The large majority of expansion projects (9 700 km) were still in the planning and approval phase (BMWK, 2022[16]). Grid expansion raised concerns – among others – over soil damage and related compensation measures for farmers and citizens.

In 2022, the federal government approved new measures to simplify and accelerate planning, while ensuring more equally distributed onshore wind power (Table 1.1). Planning responsibility was transferred from state to federal level to streamline the process and avoid fragmentation of tasks. All new power network planning must contribute to building a climate-neutral grid. Getting citizens on board through increased local participation and community benefits from wind farm development, could help gain local support and reduce the number of legal appeals.

Addressing the skills gap

Germany also needs to urgently address the shortage of skilled labour across the renewable energy sector, which lacks more than 200 000 workers (electricians, heating and air-conditioning technicians, IT specialists) (Monsef and Wendland, 2022[18]). The number of employees in the renewable energy sector decreased by 17% between 2011-21 (Figure 1.8). Green jobs have mainly been lost in the solar industry due to global competition, notably with Asia. Despite massive public investment in innovation to build the German solar industry, the country has no longer any major solar panel or cell manufacturer. A similar trend occurred in the wind power industry a couple of years later. To date, skilled workers are mainly missing in the building sector to advance climate-friendly solutions.

The trend in green employment was reversed as of 2020 thanks to the Skilled Immigration Act, which entered into force in March 2020. It provides the legal framework to facilitate immigration of skilled workers from non-EU countries, including a fast-track procedure. However, many administrative hurdles remain, such as recognition of qualifications and language requirements.

Figure 1.8. The number of employees in the renewable energy sector is slowly growing again

A new Skilled Immigration Act is under discussion. It aims to further simplify and accelerate administration, while make working and living conditions more attractive to facilitate immigration of skilled workers at a much larger scale. A new points system may open the door to third-country nationals with “good potential” to come to Germany to seek a job. To date, foreigners need a contract offer. An online portal, “Make it in Germany”, provides information for qualified skilled workers from abroad. It is also crucial to expand adult learning opportunities and support the labour market integration of women. The gender divide in green jobs is particularly strong in Germany. Women make up 26.9% of workers in green-task jobs, compared to 28.3% across the OECD (OECD, 2023[19]).

1.1.3. Progress towards net zero

National and international climate targets

Germany has ambitious climate policies, and the federal government has recently further raised these ambitions. The federal government intends to massively expand renewable energy, increase energy efficiency and develop a climate-neutral industrial policy. Germany has set an economy-wide greenhouse gas (GHG) emission reduction target of at least 65% by 2030 and at least 88% by 2040. The country aims to be climate neutral in 2045 (five years earlier than the EU target) and achieve negative GHG emissions after 2050 (Figure 1.9). National targets are enshrined in the Federal Climate Change Act, which was approved in 2019 amended in 2021. In parallel, the federal government also aims to increase the contribution of the land use, land-use change and forestry (LULUCF) sector to reach carbon removals of at least -25 million, -35 million and -40 million tonnes of CO₂-equivalent (Mt CO₂-eq.) by 2030, 2040 and 2045, respectively (Section 2.3.2). Moreover, some Länder have set more ambitious subnational climate goals. For example, the state of Baden-Württemberg aims to become climate neutral in 2040. To that end, it approved a Land-level Climate Protection Act in February 2023, covering mitigation and adaptation efforts.

Germany’s climate policy is aligned with EU climate legislation, including the EU Emissions Trading System (ETS), the Effort Sharing Regulation, and transport and land-use legislation. Emissions reduction targets under the EU Effort Sharing Regulation (covering the non-ETS sector) are legally binding. Within the Europe’s Fit-for-55 package, its national emissions reduction targets in non-ETS sectors shall be raised from -14% in 2020 to -50% by 2030, compared to 2005 levels.

Figure 1.9. Germany needs to accelerate climate action to reach its 2030 and 2045 climate targets

On the international scene, Germany encourages stronger alliances for progress on climate protection. Within its G7 presidency in 2022, the country initiated an international Climate Club to help define common standards for emission measurements and carbon pricing, among other goals (Box 1.4). Moreover, Germany is a major provider of global climate finance, contributing to fulfilling the collective USD 100 billion goal (Section 2.4.3).

Box 1.4. The international Climate Club

Upon Germany’s initiative, G7 countries proposed in December 2022 the terms of reference for an open and co-operative international Climate Club. Work will be led by a Task Force, chaired by Germany and Chile, with an interim secretariat assumed in tandem by the OECD and the IEA. The Climate Club is set to be formally launched in 2023. The Climate Club will provide a “high-ambition intergovernmental forum for discussion and serve as an enabling framework for increased co-operation, improved co-ordination and potential collective action” (G7 Germany, 2022[20]). It advocates for a socially just transition of industries towards climate neutrality. Beyond G7 countries, developing and emerging countries are invited to join the initiative.

The Climate Club is built on three thematic pillars:

Advancing ambitious and transparent climate change mitigation policies
Transforming industries
Boosting international climate co-operation and partnerships.

Initial focus will be placed on the second pillar to unlock potential for the decarbonisation of hard-to-abate industrial sectors and counter the risk of carbon leakage. The Club intends to accelerate work on joint standards, methodologies and strategies for industrial sectors. For example, climate-friendly commodities, such as green steel, could enter the market more quickly and be ramped up globally.

Source: (G7 Germany, 2022[20]).

Climate governance and finance

Since end 2021, four key federal ministries have shared the main responsibilities for climate action at the federal level: the Ministry for Economic Affairs and Climate Action (BMWK), the Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV), the Foreign Office, and the Ministry for Economic Co-operation and Development (BMZ). Climate mitigation has received increased policy attention through its integration into the BMWK, while climate change adaptation remains a core responsibility of the BMUV. The Federal Foreign Office is responsible for climate change negotiations; and the BMZ manages Germany’s global climate finance for emerging and developing countries. However, climate action is mainstreamed in all government sectors and many other ministries and local governments take part in the implementation of climate action in respective work areas. A Climate Cabinet facilitates inter-ministerial co‑ordination and monitors the effectiveness, efficiency and target accuracy of new measures. Climate measures are mainly implemented at Länder level. Implementation is also supported by the German Environment Agency (Umweltbundesamt), and research institutes. An independent Council of Experts on Climate Change (Expertenrat für Klimafragen), created in 2019, assesses annual GHG emission trends and the effectiveness of measures. It also advises the federal government on implementation of the Federal Climate Change Act.

According to the Ministry of Finance, over EUR 80 billion was earmarked for climate action investment under the Climate Action Programme and the economic stimulus package for 2020 and 2021. In 2022, the Energy and Climate Fund was transformed into a new Climate and Transformation Fund (Klima- und Transformationsfonds, KTF), with a budget of about EUR 178 billion for 2023-26, including EUR 36 billion for 2023. The fund mainly focuses on the building sector, electric mobility, hydrogen development and energy efficiency. The federal government underlines the need for a specific instrument to respond more flexibly to its climate protection target and finance climate change mitigation efforts. However, this means that climate action is financed through various funding sources (e.g. federal budget, KTF, sector-specific programmes, Länder-level funds, EU funds). Spending efficiency could be raised through better use of spending reviews and policy impact evaluation (OECD, forthcoming[3]).

Box 1.5. Policy framework for Germany’s climate action, 2014-23

2014 Climate Action Programme 2020, focusing on its national goal to reduce GHG emissions by at least 40% in 2020 compared to 1990 levels.

2016 Climate Action Plan 2050 (Klimaschutzplan 2050), including sector-specific mitigation targets.

2019 Federal Climate Change Act (Bundes-Klimaschutzgesetz, KSG) with legally binding emission goals by 2030 under the EU Effort Sharing Regulation and in line with the Paris Agreement. It introduced so-called immediate action programme (Sofortprogramme) and a Council of Experts on Climate Change (Expertenrat für Klimafragen).

2019 Climate Protection Package 2030 (Klimaschutzprogramm 2030) to translate the goals of the Climate Action Plan 2050 into practice; it includes, among other climate policies, a carbon pricing system for transport and heating.

2019 Creation of a “Climate Cabinet” (Klimakabinett) by the German Chancellery bringing together ministries of the environment, economics, finance, transport, agriculture and the interior.

2021 Germany’s Federal Constitutional Court rules parts of the Federal Climate Change Act unconstitutional arguing that emission reduction targets “lack sufficient specifications for further emission reductions from 2031 onwards”.

2021 German Parliament (Bundestag) approves amendment to the Federal Climate Change Act, increasing annual reduction targets per sector from 2023-30 and enshrining annual reduction targets for 2031-40 into law (Box 1.6)

2021 Immediate Climate Action Programme for 2022, supported by an additional EUR 8 billion.

2023 Approval of EUR 4 billion Federal Action Programme on Nature-Based Solutions for Climate and Biodiversity

2023 Federal Climate Change Adaptation Act (under development) (Chapter 2).

Figure 1.10. Germany has decreased emissions but remains among the top OECD emitters

Mitigation trends and sectoral targets

A historic emitter, Germany produces about 2% of global emissions and is still among the ten largest GHG emitters in the world (Figure 1.10). In 2020, the country managed to reduce its emissions by 41.3% compared to 1990 levels (or 729 Mt CO₂-eq), meeting its 40% target for 2020. This is one of the strongest records of emission reductions in the OECD. However, emission reductions related to the COVID-19 pandemic proved to be only temporary and have quickly been reversed. Moreover, the temporary increase of coal-fired electricity generation will further increase the gap between recorded emissions and targets. The federal government aims to get back on track from 2024 and will need to accelerate new climate measures to achieve its ambitious 2030 targets. To that end, it will need to assess the short- and medium-term impact of energy emergency measures, update GHG projections and develop additional climate measures to fill the gaps on its pathway towards net zero.

Energy industries remain the largest GHG emitter but have managed to halve emissions since 1990 (Figure 1.11). Reductions were due to a shift towards a less carbon-intensive energy mix and gains in energy efficiency. Emissions from transport, the second largest emission source, have increased by about 3% since 2005, accounting for 20% of Germany's GHG emissions in 2020. Road transport remains the primary driver of transport emissions. Emissions from agriculture (9% in 2020) have been relatively stable during the past decade, recording only a slight decrease. Methane from animal husbandry and nitrous oxide from agricultural soils are the main sources of emissions. Livestock represents about half of Germany’s agriculture emissions. The building sector has missed its sectoral target for the second time in 2021. About three-quarters of emissions come from residential buildings. Germany developed a long-term renovation strategy in 2020 to accelerate building renovation (Section 1.3.2).

Figure 1.11. Germany is on track to meet its sectoral GHG targets, except transport and buildings

Under the EU Effort Sharing Regulation, adopted in 2018, Germany needs to comply with binding annual targets for emissions outside EU emission trading (agriculture, buildings, small industries installation, transport and waste management). This means that if Germany misses these binding targets, it may need to purchase surplus emission rights from other countries. Between 2013 and 2020, Germany missed climate targets in key sectors, notably transport and buildings. To comply with its commitment, Germany had to purchase emission allowances under the EU Effort Sharing legislation. A lack of sector-specific progress will demand acquiring offsets, which will have significant financial consequences (OECD, 2022[21]).

In addition, the federal government has set up national annual CO₂ emission budgets for six sectors until 2030, along with a monitoring and policy adjustment mechanism (OECD, 2022[21]) (Box 1.6). Four sectors (energy, industry, agriculture, waste and other) achieved sector-specific annual reduction targets in 2021; transport and buildings did not meet their respective national annual budgets. The federal government prepared immediate action programmes to correct the trajectories of these two sectors. However, additional measures will be necessary to make faster progress in these two sectors (Sections 1.1.4 and 1.3.2).

Box 1.6. Policies in practice: Germany’s annual sectoral emissions targets

The Federal Climate Change Act defines quantified, annual greenhouse gas (GHG) emissions reduction targets for six individual sectors: energy, (small) industry, buildings, transport, agriculture, and waste and others. The targets are set in line with the European GHG reduction plans, following a linear trajectory. The pace of emissions reductions varies by sector, and the amendment of 2021 tightened targets for each sector until 2030 (Table 1.2). Some federal states have also set sector-specific targets at Länder level.

The Federal Climate Change Act introduced a mandatory emissions monitoring mechanism in which sectoral emissions are assessed annually. If a sector fails to meet its annual target, the responsible ministry must prepare an immediate action programme (Sofortprogramm), which is assessed by the independent Council of Experts on Climate Change and then presented to the German Parliament. The policy adjustment mechanism aims to ensure that corrective action is taken on time and that all ministries play their part in national climate efforts. However, at a coalition meeting in March 2023, government parties agreed to soften the policy adjustment mechanism of annual sectoral targets. In future, sectoral targets may become less stringent, as long as total annual GHG emission budgets across sectors are being met. This means that lack of progress in one sector can be counterbalanced by strong emission reductions in another sector.

While climate action has been mainstreamed in nearly all policy areas, some sectors face more difficulties to reconcile sectoral objectives with climate targets. A sector-based approach is thus useful to monitor and measure progress towards achieving annual emissions reduction targets at sector level. Sector-specific climate action also contributes to much-needed transformative change with broader environmental benefits. However, harmonised carbon prices could be an even more efficient way to address significant differences in abatement costs across sectors. If Germany sets a cap in its non-ETS sectors in line with its overall target to reduce emissions, the sectoral targets may be less critical because the emission reduction will occur where abatement costs are lowest (OECD, forthcoming[3]).

Source: OECD (2022), Germany’s annual sectoral emissions targets, IPAC Policies in practice.

Sector	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030	Reduction (%)
Energy	280		257								108	-61.4
Industry	186	182	177	172	165	157	149	140	132	125	118	-36.6
Buildings	118	113	108	103	97	92	87	82	77	72	67	-43.2
Transport	150	145	139	134	128	123	117	112	105	96	85	-43.4
Agriculture	70	68	67	66	65	63	62	61	59	57	56	-20.0
Waste and other	9	9	8	8	7	7	6	6	5	5	4	-55.6

Source: Federal government (2021), Federal Climate Change Act.

1.1.4. Sustainable mobility

The decarbonisation of Germany’s transport sector is not on track. Road transport is responsible for nearly all transport-related emissions. Passenger cars represent the bulk of transport-related emissions at 60%; freight accounts for about one-third. Emission reduction efforts have been counterbalanced by the rising number of cars (Figure 1.12) and more traffic from heavy duty trucks. The sector missed its 2021 CO₂emission reduction targets by 3 Mt CO₂-eq. The independent Council of Experts on Climate Change judged the proposed immediate action programme to be “insufficient” (ERK, 2022[11]).

Germany faces gaps both for ambition and implementation. Many opportunities such as broader use of speed limits, tolls for passenger and light duty vehicles, congestion charges in urban areas have not been taken; others, such as increased parking fees, are slowly materialising. A general speed limit of 120 km/h or 130 km/h on federal motorways would reduce emissions by 2.6 and 1.9 MtCO₂-eq. per year, respectively (UBA, 2020[22]). While electric mobility will play a key role in decarbonising transport, Germany should not aim to replace each petrol- and diesel-fuelled car with an electric vehicle.

Germany will need to take bold action to move from individual policy measures mainly focused on “making cars cleaner” to an integrated mobility strategy for net-zero systems by design (OECD, 2021[23]). This requires a long-term vision that integrates all transport modes with a view to building synergy. An annual report on sustainable mobility could help track progress on various elements of Germany’s transport transformation. The country needs to reduce car dependency by better internalising the social costs of road transportation through road pricing and by providing sustainable alternatives (public transport, cycling infrastructure and walking).

Figure 1.12. The vehicle stock keeps increasing and remains dominated by fossil fuel cars

Germany has one of the densest road infrastructure networks worldwide. Plans to expand federal motorways (e.g. from six to eight lanes) need to give more attention to environmental concerns. A clear priority to investment in public transport and a shift from new roads to the maintenance and improvement of existing infrastructure would help advance the modal shift (Box 1.7).

Box 1.7. Policies in practice: Strict environmental criteria for new road building in Wales

The government of Wales developed a Sustainable Transport Hierarchy of walking and cycling; public transport; ultra-low emission vehicles; and other private motor vehicles. This guides future investment, giving priority to managing and upgrading existing transport infrastructure.

In line with this approach, the Welsh government has set strict environmental criteria for building roads. According to the Wales Transport Strategy 2021, any new road project should focus on “minimising carbon emissions, not increasing road capacity, not increasing emissions through higher vehicle speeds and not adversely affecting ecologically valuable site” (Welsh Government, 2021[24]). Consequently, major road building projects have been scrapped over environmental concerns. The Welsh approach is based on a Roads Review, undertaken by an independent panel.

The Roads Review proposes four tests to justify building roads:

To support modal shift and reduce carbon emissions (prevent increase in demand for private car travel; targeted approaches depending on location).
To improve safety through small-scale changes (to address specific safety rather than wider road improvements and increases in road capacity. Speed limits should be considered as one of the primary tools for improving safety).
To adapt to the impacts of climate change (ensure roads can continue to function and contribute meaningfully to modal shift).
To provide access and connectivity to jobs and centres of economic activity in a way that supports modal shift (new and existing access roads will be necessary to connect new developments, including Freeports, to the existing network).

Source: Welsh Government (2021). National Transport Delivery Plan 2022 to 2027.

Germany is the European country with the longest distances of daily urban travel. On an average day, urban dwellers in Germany travel 19 km, compared to less than 6 km in Greece (Eurostat, 2021[25]). Less than a third of this daily urban travel is related to work. Urban mobility remains heavily car-dominated representing about 70% of daily travel distances. Local public transport, cycling and walking represent 8%, 6% and 4%, respectively. Urban planning needs to better reflect sustainable mobility priorities by creating functional urban areas that shorten distances between home, work and leisure activities. Integrating land-use planning and promoting densification also play an important role.

Electric mobility

The share of electric vehicles (EVs) is rapidly growing but remains modest in the total vehicle stock. Between 2020 and 2021, EV sales doubled, reaching about 25% of newly purchased vehicles by end 2021. Germany is the largest market in terms of number of EVs sold in Europe. It also offers some of the highest subsidies (IEA, 2022[26]). The purchase premium mostly benefited companies that decided to renew and modernise their vehicle stock while also gaining tax exemptions. The federal government started scaling back support in 2023 (a maximum of EUR 4 500 instead of EUR 6 000 for the purchase premium). As of September 2023, only private consumers can benefit from the scheme. Support for hybrid vehicles has been abolished. As the electric vehicle market is maturing, it makes economic sense to gradually scale back public support.

The country surpassed the 1 million EV mark in 2022 (including hybrid vehicles), two years after its 2020 goal. However, the country has still a way to go to reach the federal government’s goal of 15 million EVs and 1 million charging points by 2030. A new master plan (Ladeinfrastruktur II) aims to boost the expansion of charging infrastructure. In May 2022, Germany had about 60 000 charging points, which means it would need to build about 300 new ones per day to reach its target (PwCNetwork, 2022[27]).

While a more dense and reliable charging infrastructure is a prerequisite for further expansion of electric mobility, the large majority of charging processes take place at home or at work. Policy makers should think more strategically about how to build a coherent, spatially balanced, user-friendly network of fast-charging points across the entire territory. More particularly, low-density areas will require public financial support to establish and maintain public charging stations in areas that lack a commercial market. This requires strong co‑ordination between the federal government and federal states.

Many other bottlenecks impede the uptake of EVs: the purchase price is still perceived as high, although EVs are already cheaper than fossil fuel vehicles from a life cycle perspective given the much lower operational costs. In addition, shorter waiting periods, a broader and more attractive product range, as well as improved battery range and charging speed would help convince a larger number of customers to make the switch. Easy access to local charging points at home, at work or in commercial centres are also important factors.

Figure 1.13. The share of electric vehicles has been growing fast in recent years

The transition to electric mobility involves a massive transformation of the German automotive industry with heavy impacts on future employment in the car sector. The number of directly employed people working in the car industry could – in a worst-case scenario – be halved from over 800 000 in 2021 to 400 000 by 2030 (NPM, 2020[28]). Less pessimistic estimates suggest around 90 000 job losses by 2030 (VDA, 2022[29]). Moreover, a large number of small and medium-sized supply companies will no longer be needed. Large-scale job losses are inevitable. However, the impact can be softened through early anticipation and strategic workforce planning (e.g. reduced recruitment, vocational training, upskilling and early retirement schemes). In the context of new challenges related to electromobility, digitalisation and autonomous driving, the car industry needs to take an active part in the transformation of transport and proactively shape its future.

1.1.5. Sustainable farming

The environmental performance of agriculture varies largely across regions. High livestock concentration and intensive land use affect agricultural areas in the north-west and south-east. Diffuse agriculture pollution places pressure on surface water and groundwater bodies (Section 1.1.9). More particularly, nitrogen surpluses remain a major problem in some areas. In 2017 and 2020, the federal government revised the fertiliser legislation comprehensively and expects a significant reduction of nitrogen surpluses, as well as of ammonia and nitrous oxide emissions. Within the new EU Common Agricultural Policy (EU CAP) (Box 1.8), an eco-scheme encourages farmers to renounce the use of plant protection (e.g. chemical-synthetic pesticides at plot level). However, it will take several years before the impact of these measures will become visible. In turn, tighter regulations would require enhanced compliance control, which would also be challenging.

Figure 1.14. Nitrogen surpluses remain a major problem in some areas

Agriculture represented about 9% of national GHG emissions in 2020 (Section 1.1.3). Emissions have been relatively stable during the past decade. Methane from animal husbandry and nitrous oxide from agricultural soils are the main sources of emissions. In many countries, the agriculture sector is considered to be a “difficult” sector for advancing decarbonisation, especially as agriculture pollution is diffuse and emissions are not easily attributable to individual farmers. It is therefore tricky to measure emissions. As in other countries, direct monitoring of farm-level emissions is not yet practical, but emissions can be estimated indirectly using farm-level data. Therefore, Germany should pursue efforts to improve measuring of farm-level emissions (e.g. estimates of GHG emissions based on farm practices) and consider exploring the introduction of an agricultural emissions pricing mechanism (e.g. New Zealand) (OECD, 2022[30]). A stronger focus could also be placed on promoting energy-efficient agriculture (Section 1.3.4) and activities for enhanced carbon sequestration in agriculture, including pastures (OECD, 2022[31]). The sector could thereby not only reduce GHG emissions from agriculture but also unlock its green potential as a carbon sink.

The new EU CAP 2023-27 could support Germany in making its agriculture greener and more sustainable. The federal government is also committed to promoting climate-friendly food systems worldwide by supporting COP27 targets for agriculture and policy dialogue within the Global Forum for Food and Agriculture. However, despite progress, ambition in the agricultural sector will need to be further raised to reverse the loss of species and improve the sector’s climate balance (Section 2.3.1).

Box 1.8. Germany’s CAP Strategic Plan

Towards an economically sustainable, greener and fairer CAP

Within the new Common Agricultural Policy (CAP) 2023-27, Germany’s CAP Strategic Plan aims to support the transition to a sustainable, resilient and modern agricultural sector. Overall, the new strategic plan has tightened up environmental and climate-focused requirements and increased opportunities for additional payments for farmers willing to deliver voluntary environmental services (e.g. eco-scheme measure for non-productive land; premiums for the cultivation of protein crops; support for conversion to, and/or maintenance of, organic farming).

The strategy is built around three objectives:

An economically sustainable and fairer CAP: continued income support to keep farms viable and raise the attractiveness of the sector (EUR 2.5 billion of basic income support); stronger focus on small and medium-sized farms; specific support for mountainous regions and other disadvantaged areas (EUR 1 billion); support for modernisation (EUR 933 million) and the uptake of agricultural insurance schemes (EUR 177 million).
A greener CAP: farmers’ support more strongly conditioned to mandatory climate and environmental practices; introduction of new requirements for drainage in peatlands and wetlands; additional support schemes – at federal and Länder levels – for various practices beneficial for the climate and environment moving beyond the mandatory standards.
A socially sustainable CAP: targeted support for over 800 young farmers; support for investment in line with Länder-specific needs (e.g. investment in processing and marketing capacities in rural areas); creation of more than 20 000 new jobs and support for 40 000 rural businesses.

Source: EC (2022), At a glance: Germany's CAP Strategic Plan.

The Federal Ministry of Food and Agriculture (BMEL) focuses on ten key climate action measures to advance the decarbonisation of the agricultural sector. Current programmes notably aim to reduce the use of nitrogen fertilisers, and promote organic farming and carbon sequestration. Within the Investment and Future Programme 2021-24, Germany foresees spending EUR 816 million. This will be allocated to investments in agricultural machinery for precision agriculture, storage capacity of farm manure and small-scale facilities for manure separation, as well as related planning and advisory services.

Germany aims at reducing its livestock over time by supporting farmers to develop alternative income options. This would decrease emissions and free up a considerable amount of agricultural land so far used to produce animal feed. Within the 2022 Climate Action Programme, the federal government also supports the construction of low-emission storage facilities for liquid manure, the retrofitting of storage facility covers and the construction of low-emission livestock stables. Animal welfare has gained increasing public attention (e.g. new mandatory labelling system, discussion on a meat tax and a state-funded long-term animal welfare premium).

Promoting expansion of organic farming is one of the federal government’s top climate measures for the agriculture sector. It estimates an emission reduction potential between 1.9-7.5 Mt CO₂-eq. annually.1 In line with a European-wide trend, organic farming has nearly doubled in the past decade, representing 11% of total agricultural area in 2021 (Figure 1.15). More than 36 000 farms were certified as operating according to organic farming standards. However, Germany would need to significantly accelerate efforts to reach its new target of 30% by 2030 and could also reduce regional disparities. There is scope to increase organic farming and related demand in all agricultural areas.

Figure 1.15. Germany’s share of organic farming is increasing but needs to triple to reach the 2030 target

1.1.6. Atmospheric emissions and air quality

Emissions of air pollutants are trending down and are decoupled from growth of GDP (Figure 1.16). Germany complied with EU emission reduction commitments for all pollutants in 2020 (EC, 2022[32]). Germany also reached its 2020 Gothenburg Protocol objectives for sulphur dioxide and nitrogen oxides, non-methane volatile organic compounds and ammonia emissions. Emission intensities per unit of GDP and per capita are all lower than the OECD average. The country projects to meet the EU emission reduction commitments for major air pollutants without additional measures, except for ammonia between 2020 and 2029.

Figure 1.16. Air emission reductions are on track overall

Air pollution is still a major health concern for citizens. In 2020, nearly 29 000 premature deaths were attributable to concentrations of small particulate matter (PM_2.5), 10 000 to nitrogen dioxide (NO₂) concentrations and 4 600 to ozone concentrations (EEA, 2022[33]). Five air quality zones still exceeded the EU limit value for NO₂ in 2020 (EC, 2022[32]). People in bigger cities are much more exposed to PM_2.5 than the national average. The tightening of emission values of low emission zones could help reduce air pollution. Ultra-low and zero emission zones have proven to be effective in other countries (Box 1.9). Cities and municipalities need to be empowered to play a leading role in improving air quality. Germany is still far from achieving the global air quality guideline of the World Health Organization for PM_2.5.

Figure 1.17. German citizens are unevenly exposed to air pollution

Box 1.9. Policies in practice: London’s congestion charges and low emission zones

London’s Congestion Charge zone is one of the largest in the world. It was set up nearly two decades ago to discourage road traffic in central London, improve air quality and raise additional resources for public transport. A low emission zone for heavy goods vehicles was created in 2008. In addition, the city of London introduced the world’s first 24-hour ultra-low emission zone (ULEZ) in 2019, covering 4 million people or about a third of the city’s population. While traffic congestion in central London remains a challenge, carbon emissions and other air pollutants from transport have been reduced. According to the 2022 six-month assessment report of the expanded ULEZ, a larger share of vehicles in London is cleaner, contributing to London’s commitment to becoming a zero-carbon city by 2030. Nearly 94% of vehicles driving in the ULEZ meet the emission standards on an average day. The city of London also recorded a sharp decline in the use of diesel cars driving in the ULEZ, resulting in cleaner air and important health benefits for Londoners. On average, there were 44 000 fewer diesel cars each day, representing a 20% reduction.

Source: OECD (2022), London’s congestion charge and its low emission zones, IPAC Policies in practice.

1.1.7. Waste management

Germany is one of the best performing OECD countries in terms of environmentally sound waste management. The country has one of the highest recovery rates and the second highest recycling rate in the OECD area. About two-thirds of municipal waste are recycled or composted. A ban of municipal waste landfilling has been in place since 2005.

Waste is managed at the subnational level. Regional waste management plans are conceived at Länder level and implemented by local authorities. Some Länder and municipalities have set up weight-based pay-as-you-throw pricing models. Waste separation is mandatory, using four different bins in nearly every house (light-weight packaging, paper waste, household waste and biowaste). Germany also has a nationwide deposit system for certain beverage bottles (Pfandpflicht).

As in other countries, packaging waste increased in relation to the COVID-19 pandemic. As of 2023, takeaway food and drinks suppliers such as restaurants, canteens, supermarkets or fuel stations must offer their products in reusable packaging, without any extra cost. This measure will greatly contribute to reducing the use of disposable plastic packaging. While being the largest exporter of plastic waste in the European Union, Germany has had a five-point plan since 2018 to reduce plastic waste and support international efforts to reduce marine litter. A broader waste prevention programme is under development.

Figure 1.18. Municipal waste management has greatly improved, but waste levels remain high

Germany made little progress to reduce municipal waste and needs to strengthen waste prevention. On average, a German citizen produced 632 kg of waste in 2020, compared to 505 kg within the OECD Europe area (OECD, 2022[34]). In total, about 11 million tonnes of food along the food chain, is thrown away every year. Efforts should focus on the whole food supply chain from farm to fork, and notably target retail and household behaviour. Cutting household food waste in half, for example, could save 6 Mt CO_2-eq (BMEL, 2022[35]).

Germany has had a national strategy for food waste reduction since 2019. It aims to halve per capita food waste at retail and consumer levels and reduce food losses along the supply chains by 2030. The federal government has established several dialogue platforms. Discussions on voluntary agreements with business organisations are underway. The public awareness raising campaign “Too Good for the Bin!” has been in place for a decade. Beyond dialogue platforms, binding measures with intermediate targets may be needed.

There are multiple ways of making progress towards behavioural changes. Food and nutritional education are of paramount importance (e.g. the indicative value of best-before dates) and could also help prevent the progression of obesity. More than one in ten children in Germany is obese or overweight, generating considerable health risks. Germany has introduced the Nutri-Score, which indicates the nutritional value of food products through a five-colour nutrition rating system (from A to E). However, the scheme is not yet mandatory.

1.1.8. Towards a more circular economy and sustainable supply chains

The federal government is working on its first comprehensive circular economy strategy, drawing on many existing strategies and programmes that already deal with these issues. Circular use of materials in Germany increased from 11.4% in 2017 to 13.4% in 2020. This is below the EU average of 12.8%; and far behind the Netherlands (30.9%) (EC, 2022[32]). However, Germany has reduced the resource intensity of its economy and has decoupled domestic material consumption from economic growth. Its material consumption per capita is below the OECD average.

Figure 1.19. Material consumption productivity is growing, but material footprint remains high

Box 1.10. Policies in practice: A handbook for businesses operating in mineral supply chains

Business activities amplify global threats related to environmental degradation, which occurs often in the upstream segment of the supply chain. In mineral and metal supply chains, for example, sediments and process chemicals such as mercury may leak from mine workings into surface water or groundwater. Risk-based supply chain due diligence can help enterprises identify, anticipate and react to environmental threats and thus address harms to air, land, water and biodiversity. This is particularly relevant in the context of rising demand for structural minerals and metals in a physically growing world economy as well as for functional materials critical to the energy and digital transition, such as cobalt, copper and lithium. Therefore, companies need to meet relevant requirements in relation to environmental, local labour, corporate governance, criminal or anti-bribery laws, in line with OECD recommendations.

Many stakeholders highlighted the need for hands-on support on how the environment-related recommendations can be implemented in practice. Within the context of 2020 Raw Materials Strategy, BMUV initiated a process to develop a “Handbook on Environmental Due Diligence in Mineral Supply Chains” by the OECD’s Centre for Responsible Business Conduct, in collaboration with the German Environment Agency and the Federal Institute for Geosciences and Natural Resources.1 It offers a six-step approach for suppliers:

1. Embed responsible business conduct into policies and management systems.

2. Identify and assess actual and potential adverse impacts associated with the enterprise’s operations, products or services.

3. Cease, prevent and mitigate adverse impacts.

4. Track implementation and results.

5. Communicate how impacts are addressed.

6. Provide for or co-operate in remediation when appropriate.

The handbook also explores opportunities to strengthen circular economy principles in the design, production, distribution, consumption and collection of products. It can be used by all types of businesses along the value chain, from mining to retail, to conduct due diligence on upstream impacts. The handbook will be launched at the 2023 OECD Forum on Responsible Mineral Supply Chains.

1. The handbook builds on the leading international, government-backed standards on supply chain due diligence and responsible business conduct: the OECD Guidelines for Multinational Enterprises and the associated due diligence framework set out in the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and the OECD Due Diligence Guidance for Responsible Business Conduct.

Source: (OECD, forthcoming[36])

As typical for many other developed economies, material footprint originates in part from outside of Germany. Germany depends heavily on imports of raw materials. Therefore, the new Supply Chain Act is a welcome development away from purely voluntary corporate social responsibility towards binding human rights and environmental obligations for companies (Initiative Lieferkettengesetz, 2021[37]). As of 2023, companies registered in Germany with more than 3 000 employees must comply with certain obligations for their entire supply chain, including human rights. Child labour, slavery and forced labour are explicitly banned. The law will be expanded to companies with more than 1 000 employees as of 2024. However, it applies only to the company's own business operations and not to indirect suppliers, which remains a loophole. The law also regulates a few environmental obligations in relation to three international conventions (Persistent Organic Pollutants, Minamata and Basel Conventions), mainly aimed at protecting human health. It could have placed a stronger focus on environmental degradation that impact other countries abroad.

1.1.9. Management of water resources

Water resources

Germany is rich in water resources, counting over 11 000 water bodies (about 8 900 rivers, 700 lakes, 80 coastal waters, 1 300 groundwater basins) (UBA, 2021[38]). About 2.2% of Germany’s surface area is covered by water. Total annual water abstractions as a share of total available renewable water resources decreased from 20.1% in 2001 to 13% in 2016. Water abstraction per capita is well below the OECD Europe average. Nevertheless, Germany is still above the 10% threshold, making it a moderate water-stressed country (Figure 1.20). With the ongoing energy transition, Germany should be able to make additional water savings. Cooling related to electricity generation represented about half of total water abstractions. Public water supply accounted for nearly 20% in 2021. Irrigated agriculture is negligible, representing less than 1% (EC, 2022[39]).

Figure 1.20. Despite water savings, Germany still faces moderate water stress

Similarly, drinking water use declined over the past decades. A German citizen uses an average of 128 litres (L) of drinking water per day in 2022, compared to 147 L in 1990 (Statistisches Bundesamt, 2022[40]). This is well below the European average of 150 litres (EurEau, 2021[41]). Germany has generally good water infrastructure with a reliable water supply; water leakage levels are traditionally among the lowest in Europe (DVGW et al., 2020[42]).

Over two-thirds of drinking water demand is covered by groundwater. However, groundwater abstractions vary considerably between federal states. While public water supply in Bremen, Hamburg, Saarland and Schleswig-Holstein relies exclusively on groundwater and spring water, the states of Saxony and Thuringia benefit from larger surface water sources (BGR, 2023[43]). Germany uses water registers to control water abstractions with a view to ensuring sufficient groundwater recharge. Water abstractions are also controlled through a permitting system, which is regularly reviewed, except for small abstractions that are not systematically registered. To date, the impacts of climate change on groundwater levels are small but they are projected to increase by the end of the century, notably in the North and the East (ClimateChangePost, 2023[44]) (Section 2.1.1).

However, Germany’s water sector will be increasingly impacted by climate change. Prolonged dry periods and heatwaves may amplify and trigger seasonal, localised water shortages. They will also lead to dried-up rivers impeding inland waterway transport, receding groundwater levels and soil moisture loss, with major economic impacts. For example, due to the record dry summer in 2019, water levels in the Rhine River sank to their lowest since 1881 (Gustafsson, 2019[45]). Disruptions in inland waterways heavily impacted the industry and contributed to increased energy prices. Many companies such as BASF, a chemical giant, invest heavily in low-water vessels to ensure adequate supply of raw materials during times of drought.

Box 1.11. Germany’s National Water Strategy

Germany’s National Water Strategy provides a comprehensive long-term vision for 2050. It aims to raise awareness of the value and sustainable use of water as a resource. The strategy emphasises the need to develop the country’s forecast capacity to better understand water needs and water availability to prevent localised water shortages and overuse in the future. As water is mostly managed at the Länder level, the strategy provides guidance and good practice examples with a view to developing uniform decision-making criteria and standards. Within the broader European context, the strategy sets goals for action and measures around four priorities:

Prevent water scarcity and conflicts of use
Adapt water infrastructure to climate change
Make water cleaner and healthier
Create a broader base to finance restructuring of the water sector.

The strategy draws on a two-year nationwide water dialogue, which is seen as exemplary. It gathered information from a broad range of stakeholders – public, private and civil society, including a council of randomly selected citizens from different regions. This also contributed to laying the grounds for implementation at all governance levels and across different sectors (e.g. agriculture, transport, water industry, research). The strategy was approved in March 2023.

Source: National Water Strategy, Federal Environment Ministry Draft Summary (2022).

In response to these challenges, Germany’s National Water Strategy develops a comprehensive vision for 2050 (Box 1.11). Modernising the water sector and adapting to climate change will require large investments. The National Water Strategy proposes an Immediate Action Plan to invest EUR 1 billion over the next ten years for water development and adaptation of the water sector to climate change (BMU, 2021[46]). Germany will also need to invest heavily in flood prevention measures. Nature-based solutions (NbS) could play a key role in building natural water retention features by increasing the absorption capacity of land close to water bodies (Section 2.3.3).

Water quality

Drinking water quality is good to very good depending on location. It is strictly monitored by regional and local public health authorities. Despite excellent tap water quality, a large number of Germans have the cultural habit to privilege bottled water. A second amendment of the Water Resources Act entered into force in January 2023. It aims to increase the number of drinking fountains in public spaces such as parks, shopping malls and pedestrian areas, and thereby protect urban citizens from the effects of heat waves. The “Trinkwasser unterwegs” app provides geolocalised information on how to find drinking fountains. Universal access to safe drinking water and sanitation has been guaranteed for a long time.

Nonetheless, water quality remains a serious concern for Germany. The Baltic Sea and North Sea face acute problems with eutrophication. While many water resources in Europe are under pressure from pollution and overuse, the situation is particularly challenging in Germany. Only 8.1% of all surface water bodies in the country reach “good ecological status” in line with the EU Water Framework Directive (WFD). Many German water bodies failed to meet environmental objectives in 2021. They would require significant improvement to meet 2027 targets under the third set of River Basin Management Plans (2022-27) (EC, 2022[39]).

Moreover, no single surface water body in Germany achieved good chemical status. This can be explained by persistently high levels of nutrients, primarily phosphates, as well as contamination with mercury, notably in the Elbe River (Federal Government, 2021[5]). However, a more detailed analysis is necessary to closely monitor progress in basins that are not formally compliant under the WFD. Germany also plays a major role in the management of transboundary rivers in Europe (Danube, Elbe, Rhine). Cross-border co‑operation needs to be further enhanced to reduce pollution and ensure sustainable use of water resources across borders.

Groundwater pollution due to diffuse agriculture pollution remains a major challenge. The federal government is not on track to achieve its target of a maximum nitrate concentration of 50 mg/L at every groundwater monitoring point by 2030. The recent revisions of fertiliser application legislation in 2017 and 2020 intend to address damaging effects of nutrient inputs. However, it will take several years before the impacts may become visible as the nitrate value in groundwater can only be reduced slowly due to hydrological conditions. Therefore, Germany needs to strengthen efforts to adequately monitor and address groundwater pollution, particularly in intensive farming areas. Its move towards promoting organic farming and reducing livestock quantities (Section 1.1.5) goes in the right direction and will help counteract nutrient pollution. Germany still has a way to go to fully meet its obligations under the WFD and the EU Nitrates Directive. The promotion of NbS has great potential to make progress in this area (Section 2.3.3), alongside economic incentives to further reduce the use of fertilisers.

Wastewater treatment

Germany is one of the best performing OECD countries when it comes to wastewater treatment (Figure 1.21). The country has nearly universal tertiary (“advanced”) treatment. Only 3% of the population does not benefit from a connection and 2% has independent treatment systems. Sewage water represented about half of treated wastewater. Germany complies with the EU Directive on Urban Wastewater Treatment (EC, 2022[39]). The revised directive is under discussion with a view to introducing new, tighter rules on treating urban wastewater. It provides an opportunity for Germany to advance its transition towards a more circular economy in the wastewater sector, including a better application of the polluter pays principle. Among others, this includes integrated planning obligations to better handle heavy rain, enlarging the scope to cover small cities, stricter thresholds for removing nutrients, additional treatment for micropollutants and health parameters to monitor pandemics (EC, 2022[39]). These measures are all relevant to help Germany reduce harmful pollution and thus improve its water quality.

The number of accidents involving water-hazardous substances continued to decrease. However, about 2 000 accidents were recorded in 2021 and an estimated 1.4 million L of polluted water leaked causing permanent damage to the environment. This is less than half of the amount recorded in 2020 (3 million L) (Statistisches Bundesamt, 2022[47]). Moreover, nearly a third of water treatment systems for water-hazardous substances inspected recorded some type of deficiencies, including 10% with significant problems, suggesting a need for enhanced pollution control.

Figure 1.21. Germany’s wastewater treatment is excellent in international comparison

Water pricing

Water is managed at the local level by public and private operators. Water tariffs are levied at subnational level and represent usually a rather minor share of household income. The cities of Stuttgart, Munich, Frankfurt and Cologne are among EU cities with the most expensive water tariffs (EUR 3 or more per cubic metre) (Water News Europe, 2021[48]). The Local Rates Act and federal acts provide the framework for the calculation of tariffs, ensuring full cost coverage, which means that water tariffs include all actual costs incurred to companies, including capital costs (EurEau, 2021[41]). Therefore, water tariffs vary largely across Germany (Figure 1.22).

Figure 1.22. There are large regional disparities in drinking water tariffs

Thirteen Länder have introduced a Water Cent as a charge for water abstraction from surface water and groundwater. Raised revenue is mainly used to encourage water savings and compensate farmers for reducing the use of fertilisers and pesticides. Discussions are now underway to increase the amount of the Water Cent (e.g. 8 cent water charge proposal in Bayern, which has not yet introduced such a charge) and use some of the revenue for flood prevention measures (EEA, 2021[49]). Moreover, the federal government intends to restructure wastewater charges to create stronger incentives for reducing water pollution from municipal and industrial wastewater (BMU, 2021[46]). This would further enhance more sustainable use of water.

1.2. Environmental governance and management

1.2.1. Institutional framework for environmental governance

Germany has a sophisticated, well-developed institutional system that ensures vertical and horizontal co‑ordination. German governance, which is based on federalism, aims to ensure that social and political issues are addressed by the lowest level of government possible. In practice, there is still room for improvement at various levels. This is especially the case to reduce administrative silos and encourage a more pragmatic and flexible application of shared responsibilities between different governance levels and joint funding mechanisms. Spontaneous, informal co-operation and information exchange could be further encouraged.

As a member of the European Union, Germany has a large number of environmental and climate policies that fall under EU legislation. Drawing on Germany’s leadership in Europe, it has contributed to shaping new EU policy (e.g. European Green Deal, Fit-for-55 package, REPowerEU, EU CAP2). At the same time, Germany has benefited from more environmentally rigorous EU directives. Implementation of environmental policies is mainly managed by the 16 Länder within Germany’s federal system. The German Environment Agency provides a comprehensive guide to Germany’s environmental administration (UBA, 2019[50]), covering instruments, administration and compliance assurance.

Central government and horizontal co‑ordination

Despite recent changes to Germany’s climate governance (Section 1.1.3), the BMUV remains the institutional backbone for environmental issues at the federal level. Its work is supported by specialised agencies, namely the German Environment Agency, the Federal Agency for Nature Conservation (Bundesamt für Naturschutz), the Federal Office for Radiation Protection (Bundesamt für Strahlenschutz) and the Federal Office for the Regulation of Nuclear Waste Management (Bundesamt für kerntechnische Entsorgungssicherheit), as well as a growing number of independent expert committees.

Environmental issues are largely mainstreamed across sectoral ministries. Inter-ministerial co‑ordination is well developed. When designing a new policy or programme, a lead ministry must consult with other relevant ministries, as well as with local authorities at Länder level if they are involved in the implementation of proposed measures. However, the Ressort principle places the lead ministry in a powerful position, as it has the direct right of initiative. Ministries sometimes face conflicting interests between sectoral priorities, and climate and environmental goals. While consultations always take place, they also need to have a meaningful impact on the design of new policies.

Local government and vertical co‑ordination

Germany applies a three-tiered system of government: the national level (Bund – Federation), the Länder and a two-tiered system of local government comprising counties (Kreise), and cities and municipalities (Städte and Gemeinden). The administration structure of the federal level is generally mirrored at Länder level (Land-specific Ministry of Environment assisted by specialised technical agencies). Länder have the right to create their own subnational laws if the Basic Law does not confer legislative powers to the federal level (Basic Law, Art. 70). In some cases, subnational laws can be more stringent than national law. A biennial Conference of German Environmental Ministers brings together environment ministers of the Länder with the federal level to facilitate co‑ordination, also through joint federal-Länder working groups.

In general, the federal level sets the policy framework while the Länder level is tasked with implementation. Many federal policies and programmes are implemented at Länder level. This often leads, however, to varying results in terms of speed and outcomes. The federal government should systematically ensure that federal laws enable over-performance. It could also further develop mechanisms that oblige poor performers at subnational level to move faster. In this respect, it could take inspiration from the onshore wind sector, whose binding area targets must be implemented in all federal states (Wind-on-Land Law).

Local authorities are best placed to advance local policy issues. However, federal laws tend to place a heavy administrative burden on local administrations, which sometimes lack capacity. For example, cities and municipalities should be able to create bicycle lanes and set local speed limits more easily. They also need more flexibility in public procurement and approval processes, as well as sufficient funds for public investments (Dettling, 2022[51]). Local financial autonomy has been shrinking due to increased social expenditure, despite federal support. The Congress of Local and Regional Authorities of the Council of Europe called on German authorities to “provide local authorities with adequate financial means that allowed them discretion in how to spend the funding” (Council of Europe, 2022[52]). The taxation power of local authorities could be reformed.

1.2.2. Regulatory framework for environmental management

The regulatory framework for environmental management has been reviewed in previous OECD Environmental Performance Reviews in 1993, 2001 and 2012 (OECD, 2012[53]). The following section focuses therefore only on current policy challenges.

Overall, Germany has a solid regulatory framework for environmental management. Environmental law is generally strictly enforced. The country transcribed key European laws, such as EU directives on environmental impact assessment (EIA) or strategic environmental assessment (SEA) into national law (e.g Environmental Impact Assessment Act – Umweltverträglichkeitsprüfungsgesetz, UVPG). As part of the permitting process for major projects, a project developer must conduct an EIA on direct and indirect environmental impacts. In contrast to many other OECD countries, Germany does not have any legal obligation to report and analyse the outcomes of EIAs. Adequate staffing of licensing agencies and more streamlined procedures remain key challenges. Moreover, Germany made progress in implementing the INSPIRE Directive, which aims at developing a European spatial data infrastructure.3

Within Germany’s federal system, there is no principal environmental regulator, except for nuclear energy (BMUV). Compliance promotion, monitoring and enforcement is decentralised at Länder level. Consequently, information is scattered across various authorities and agencies at all levels. Germany has no centrally managed information on compliance handling or environmental offences. The German Environment Agency compiles some information on environmental crime (UBA, 2016[54]), but reporting could become more systematic and regular. Public access to information on compliance monitoring and enforcement could be improved through a more centralised information system. This would provide better federal oversight and allow citizens to play a more active role in compliance monitoring.

Permitting

The federal government aims to develop a comprehensive policy package to accelerate planning and approval procedures to enable the massive deployment of renewable energy projects. This also requires better planning capacity in municipalities. In line with a European Council regulation, which provides a temporary framework, renewable energy projects in Germany will benefit from a “simplified assessment for a number of environmental obligations” (EU, 2022[55]). This shall considerably shorten delays and reduce the administrative burden. For example, the permit-granting process for solar energy equipment should not exceed three months. The installation of heat pumps should be possible within one month, and within three months for larger ground source heat pumps.

While faster and less cumbersome permitting processes are urgently needed, biodiversity considerations should not be overlooked. As elsewhere, it has proven difficult to reconcile bird protection and wind power. The federal government defined a nationwide list of collision-prone breeding bird species with a view to accelerating risk assessments in the permitting process. On the one hand, the government aims to streamline and harmonise processes across 16 Länder and provide legal certainty to wind farm developers. On the other, it intends to secure ecological protection standards required by EU law. Training to ensure consistent application and adequate staffing within local administrations are also needed.

The overriding “public interest” principle should not be used as a pretext to weaken environmental impact assessment, which must remain an essential part of planning. Spatial planning for transport infrastructure and other major facilities requires an integrated analysis of current and potential environmentally harmful impacts. Climate and biodiversity considerations should be addressed coherently. Enhanced dialogue could help reduce the number of lawsuits opposing the partisans of renewable energy and the defenders of biodiversity.

The impact of accelerated permitting processes, including cumulative environmental effects, should also be carefully analysed through ex post analysis. Findings could be systematically shared and inform planning to facilitate mutual learning across the 16 Länder. Acknowledging the relationship between species protection and climate protection in the transport sector, the federal government intends to adopt key points for standardisation in species protection in the rail sector. Ultimately, there is no silver bullet for reconciling renewable energy expansion and biodiversity protection. Energy conservation and efficiency are an important part of the equation. Consumption patterns will need to change. Reducing energy consumption will be necessary to achieve an energy transition that is compatible with nature and society (Trommetter, 2018[56]).

1.2.3. Green digital transition

Germany ranked in position 13 of 27 EU member countries of the 2022 Digital Economy and Society Index (EC, 2022[57]). The COVID-19 pandemic exposed weak digital capacities as teachers and households lacked basic IT capacity to switch to remote classes. Meanwhile, health authorities relied on fax machines to transmit COVID-19 infection rates. Accelerating Germany’s digitalisation consequently became a key priority of the German Recovery and Resilience Plan (Section 1.3.1); more than half of all activities focus on digitalisation. The federal government adopted a comprehensive digital strategy in 2022 involving all ministries. It intends to introduce mandatory common norms and IT standards for public online services to improve synergy and better linkages. Digitalised public administration will also play a key role in accelerating permitting procedures.

Overall, Germany’s green and digital transitions have great potential to reinforce each other. Several pilot projects aim to develop digital applications, including geographic information systems related to environmental protection. Germany is working on a Digital Product Passport that could become a key tool to enhance the traceability of products and their components. An artificial intelligence (AI) lighthouse project is dedicated to the digitalisation in agriculture to support sustainable farming. In 2021, it started the use of AI in agriculture, food chain, health nutrition and rural areas (OECD, 2022[31]).

The Digital Access Act (Onlinezugangsgesetz) entails new duties, requirements and digitalised processes. Since the end of 2022, federal state and subnational authorities have had to provide essential information services on line. However, some municipalities will still need to gear up to fulfil this new requirement. Germany has excellent information sources on environmental and climate but they are scattered across ministries, subnational authorities, specialised agencies, research institutes and businesses. The information gateway under development – Umwelt.info – offers a great opportunity to bring together the wealth of knowledge and data in a single place while orienting users to relevant information sources.

1.2.4. Environmental democracy

Germany’s youth has been a driving force in advancing public climate action. Most prominently, the Fridays for Future, a youth-led climate strike movement launched in 2018, has played a prominent role in raising public awareness on the climate crisis. Their claim for more intergenerational justice led to the amendment of the Federal Climate Change Act in 2021 with tightened climate regulations following a ruling of the Federal Constitutional Court. Despite the COVID-19 pandemic, climate and environmental protection remained among the top priorities identified by young Germans in a youth survey (BMUV, 2022[1]). Most young people are convinced that a joint effort can help combat climate change. More recently, a minority of climate activists became more radicalised, and the term “Climate Terrorists” (Klimaterroristen) became more common in public debate. In 2022, a jury chose Klimaterroristen as Germany’s “non-word of the year”, a choice meant to criticise how use of the term tried to discredit the climate action movement.

The importance of climate change is increasingly recognised across different social groups. However, a general perception still prevails that climate change will mainly affect the Global South, and not necessarily Germany, at least not immediately. The flood disaster in 2021 had an eye-opening effect for many Germans and contributed to increasing wider acceptance for stronger climate action. This type of extreme climate event recalls the urgency of preventing future natural disasters (Section 2.1.2).

Nonetheless, the public may hold more progressive and climate-friendly views about climate action than politicians and businesses. For example, 60% of Germans supported a general speed limit of 130 km/h on German motorways (ARD, 2021[58]). About 66% of Germans believe that “they are more concerned about the climate emergency than their government” and 63% are “in favour of stricter government measures that impose changes on people’s behaviour” (EIB, 2021[59]).

1.3. Towards green growth

1.3.1. Green elements in Germany’s COVID-19 recovery package

Germany was among the first countries to present a comprehensive, national recovery package in June 2020 (EUR 130 billion). In April 2021, the domestic plan was transformed into the German Recovery and Resilience Plan (GRRP, 2021-26). It has a budget of EUR 140 billion (4% of GDP), including grants worth EUR 25.6 billion from the EU Recovery and Resilience Facility. With the plan’s extension related to adoption of the new REPowerEU chapter, scheduled for 2023, Germany should benefit from an additional EUR 4.7 billion. The EU component is based on a six-year plan, including 40 measures, to be implemented until August 2026; some 135 000 jobs are estimated to be created. About 42% of EU-funded measures support Germany’s climate objectives, while about half of all measures will foster the country’s digital transition. The green share of Germany’s domestic package was estimated to be much lower at 21% (Wuppertal Institut, 2021[60]). The EU financing focuses on decarbonisation and development of hydrogen (EUR 3.3 billion), eco-friendly mobility (EUR 5.4 billion) and renovation and construction (EUR 2.6 billion). In line with good practices, the plan mainly supports implementation of many existing measures.

An ex ante analysis of the German recovery package indicates an overall positive effect of climate-focused components of the recovery plan. The federal government did not weaken any major environmental and social regulations during the COVID-19 crisis. On the contrary, it advanced negotiations with companies on the coal phase-out. Recovery support includes little direct support for fossil fuel industries. A general purchase premium for new cars, which was proposed by the automotive industry, did not go through.

However, the plan also includes some ambiguous measures, notably in the transport sector; for example, public support for plug-in hybrid vehicles and trucks with internal combustion engines (Table 1.3). While the GRRP is clearly future-oriented with a strong emphasis on hydrogen, it pays relatively little attention to existing technologies that could make a difference in the short term, notably energy efficiency measures in the building sector. Key environmental dimensions such as biodiversity and climate adaptation are largely neglected, except in a major sustainable forestry management programme (EUR 700 million).

Sector	Key measures	Budget (EUR)
Energy	Lowering renewable energy surcharge	11 billion
	Support for hydrogen projects (electrolyser: EUR 2 billion; infrastructure: EUR 1 billion; international projects: EUR 2 billion; cross-European co-operation: EUR 1.5 billion	6.5 billion
	Removal of regulatory restrictions on the expansion of wind power and solar PV	-
Mobility	Support for public transport	2.5 billion
	Future fund for automotive industry	1 billion
	Programme for the transformation of car supply chain	2 billion
	Investment in EV infrastructure	2.5 billion
	Increase of equity capital for railway company	5 billion
	Purchase premium for electric and hybrid cars	3.2 billion
	Shipping modernisation measures	1 billion
	Support of best available technology in aviation	1 billion
	Truck fleet renewal programme	1 billion
Industry	Hydrogen use in industry	2.5 billion
Buildings	Investment in building energy efficiency	2.5 billion
Cross-cutting	VAT cut for second term of 2020	20 billion

Note: Colour code: green = positive impact; red = negative impact; grey = mixed impact.

Source: (Wuppertal Institut, 2021[60]).

Like other countries, Germany needs to ensure that recovery funds are spent efficiently (OECD, 2021[61]). The recovery package is not part of Germany’s regular annual budget cycle and draws on different funding sources at national and European level. This makes a coherent monitoring and impact assessment more complex. In some cases, reporting on existing measures under sectoral policies, which may be financed through recovery grants, may be blurred. The independent Council of Experts on Climate Change could play a role in assessing the impact and effectiveness of recovery measures and their contribution to transformative change. It is important to promote accountability and ensure a transparent impact assessment.

1.3.2. Investing in environmental and low-carbon infrastructure

Environmental protection

Germany spends more on environmental protection than many other European countries. Total national environmental protection expenditure represented about 2.2% of GDP, compared to 1-2% spent by most other European countries. Direct and indirect environmental protection investments amounted in total to EUR 84 billion in the 2014-20 period (EC, 2022[32]). Most public sector investments in environmental protection goes to wastewater management. About 12% has been spent on research and development in 2019 (Figure 1.24). Moreover, specialist producers make up for the bulk of investments (e.g. waste and water companies) and households also participate through the payment of charges and services.

Spending on biodiversity and landscape protection has been comparatively low but has increased steadily over the past decade. Since end 2021, nature-based solutions receive new policy attention. As of 2023, the spending level will increase significantly with the launch of the Action Programme on Nature-Based Solutions for Climate and Biodiversity (Aktionsprogramm natürlicher Klimaschutz, ANK), which represents a major step increase from millions to billions. The federal government plans to invest EUR 4 billion in natural climate protection (Section 2.3.4).

Figure 1.23. Expenditure on environmental protection is increasing

Clean energy

Large amounts of public support were given to the development of solar, wind and other renewable energy sources. Germany was among the first countries to introduce feed-in tariffs back in 2000 (Section 1.3.3), which guaranteed cash inflows for investors in renewable power for 20 years. Consequently, a large share of the renewable energy systems is owned by non-utility actors, including households and energy co‑operatives, leading to a highly decentralised energy system. About one-third of renewable energy is in the hands of households (Berlin Energy Transition Dialogue, 2022[62]). This bottom-up approach strengthened ownership of the energy transition, which is broadly supported by the German population.

After a decline in the past decade, investments started to grow again as of 2020. The total investments in plants for using renewable energies reached about EUR 13.4 billion in 2021, representing a 20% increase (Figure 1.24). About a third of all investments were made in solar energy. Onshore wind, biomass heat, and geothermal energy and environmental heat represented about 20% each. Strong increases have been recorded in wind energy plants, as well as heat pumps reaching 236 000 units in 2022. In parallel, applications for federal funding to install heat pumps increased strongly. Installations have been mainly impeded by the lack of availability of technicians (Section 1.1.2). The federal government aims to install 6 million heat pumps by 2030, which means that as of 2023, about half a million heat pumps will need to be installed annually, more than double the amount of 2022. This represents an immense challenge in terms of ramping up production and mobilising and training skilled technicians. Nevertheless, nearly 600 000 gas-based systems – more than double the amount of heat pumps – were sold during the same year (EHPA, 2023[63]).

Figure 1.24. Investment in renewable energy increased by 20% in 2021

Green hydrogen

The federal government invests heavily and pledged over EUR 9 billion for hydrogen within its recovery package, including about one-third from EU funding (EUR 3.3 billion) (Wuppertal Institut, 2021[60]). Several pilot programmes aim to support development of hydrogen production and its use in industry and transport sectors. Among others, four major green hydrogen projects, focusing on the development of electrolysers and fuel cells, will receive public support under state aid law following a recent EU approval. The European Commission approved a BASF hydrogen project with a view to decarbonising chemical production processes. Moreover, the RWE company aims to build three hydrogen plants with a target of 1 GW capacity in North Rhine-Westphalia by 2030. Hydrogen development is also advancing in the transport sector: Germany deployed the first fuel cell train fleet (14 trains) in Lower Saxony in August 2022; Siemens has plans to roll out its hydrogen-powered passenger train in 2024. The city of Cologne intends to deploy 60 hydrogen buses (IEA, 2022[64]).

Germany was among the world’s first countries to define a National Hydrogen Strategy in 2020, which provides the framework of the country’s hydrogen ambition. In keeping with this strategy, electrolysers with a total capacity of 5 GW are to be built by 2030. They must be increased to 10 GW ideally by 2035 or by 2040 at the latest (including the offshore and onshore energy production required for providing electricity for the electrolysis). The Renewable Energies Sources Act (EEG 2021) includes specific provisions to support the production and industrial usage of green hydrogen. An action plan sets out 38 measures for the first phase covering 2020-24 in which Germany intends to advance the market ramp-up and lay the foundations of a domestic hydrogen market. In addition, it includes EUR 2 billion in support for building foreign trade partnerships (e.g. Namibia) to promote use of German technologies in the production of hydrogen abroad.

However, green hydrogen represents less than 1% of hydrogen production, which means it produces virtually no benefit for climate change mitigation or energy security. Uncertainties around future demand, regulations and infrastructure impede investment decisions. As a next step, it will be important to clarify the regulatory framework at the European level. Market ramp-up will only be possible if the rules and conditions are clear and reliable over time. This also includes developing a common understanding by providing shared definitions of emission thresholds of different types of hydrogen. Regulatory considerations must be addressed rapidly to facilitate the building of a European hydrogen market. Climate and environmental considerations need to be a priority within Germany’s hydrogen strategy.

Buildings

Investments in energy-efficient buildings reached EUR 83.2 billion in 2020. Some 900 000 people were employed in modernising buildings (Berlin Energy Transition Dialogue, 2022[62]). New energy efficiency and climate policies for the building sector will trigger substantial additional investments. The federal government has earmarked EUR 56.3 billion for 2023-26 to support climate-friendly renovations. The coalition agreement foresees to advance the transition to renewable-based heating systems. As of 2024, every newly installed heating system shall be required to run on 65% renewable energy. This could significantly accelerate emission reduction in the building sector. However, the technical feasibility is under discussion considering major bottlenecks related to the production and installation of heat pumps.

Improving energy efficiency in buildings is essential as the sector represents close to a third of Germany’s energy demand (BMWK, 2020[10]). Overall, progress has been slow despite generous support measures, which did not sufficiently target the worst-performing buildings. Nearly half of all buildings are in urgent need of renovation (OECD, forthcoming[3]). More than 10 million heating systems are over a decade old and often inefficient (BMWK, 2022[65]).

The federal government aims to make Germany's building stock virtually climate neutral by 2045. This requires a massive transformation of existing buildings. The recent switch from a policy mix that was more geared towards new buildings to stronger policy attention to retrofitting existing buildings is welcome. The renovation rate will need to be increased significantly for the country to achieve its efficiency targets.

Box 1.12. Key policy measures to improve energy efficiency in buildings

Tighter energy standards for buildings (review of the 2020 Building Energy Act).
Regulation for heating systems: as of 2024, two years earlier than initially planned, newly installed heating systems should be operated with at least 65% renewable energy.
Support for energy-focused refurbishment and installation of energy-efficient heating systems: The federal government has earmarked EUR 56.3 billion for 2023-26 to support climate-friendly renovations.
Climate-friendly social housing: increased federal financial support to Länder for the construction of new energy-efficient social housing and for energy efficiency retrofits of existing social housing.
Updated research strategy on building renovation (Package for the Future programme providing EUR 2 billion in 2020-21).

Source: (Federal Ministry of Finance, 2022[66]).

Furthermore, the federal government provided tax incentives, financial support and information services to convince owners to take the necessary renovation measures. Discussions at EU level are underway to enforce mandatory renovation for the worst-performing public and commercial buildings. Socio-economic selection criteria could help provide more targeted support for the most disadvantaged households (DUH, 2022[67]). The introduction of a new cost-splitting between landlords and tenants depending on a building’s energy and climate performance could have a positive impact. The 2022 CO₂ Cost Sharing Act regulates the sharing of costs for CO₂ emissions regarding heating and hot water supply between landlords and tenants. This new measure provides an incentive for property owners to invest in energy-efficient building refurbishments while encouraging tenants to behave in more energy-efficient ways.4

Transport

Rail infrastructure has suffered from several decades of chronic underinvestment and the federal government should prioritise and allocate more resources to rail infrastructure, particularly for connecting rural areas to large metropolitan regions. Investment decisions of the Deutsche Bahn AG, Germany’s national rail company, also need to become more transparent (OECD, forthcoming[3]) and set the right incentives to ensure efficient maintenance. The most recent Bahn reform aims at developing faster, better co‑ordinated and more reliable connections (Deutschlandtakt). Federal support for the overhaul of the most important rail corridors is essential. This would also support implementation of the Rail Transport Master Plan’s goal of increasing the share of rail in freight transport to at least 25% by 2030. The share, currently around 19%, has nearly stagnated over the past decade (Allianz pro Schiene, 2023[68]).

As part of the energy relief package at the end of April 2022, the federal government introduced a new pilot project to enhance public transport use. The 9-euro ticket offered unlimited access to Germany’s local and regional rail system for EUR 9 per month. The cost of this measure was EUR 2.5 billion. Over 50 million Germans purchased the ticket between June and August 2022. Capitalising on this success, Germany plans to introduce as of May 2023 the digital Deutschlandticket with an introductory price of EUR 49 per month for local public transport throughout Germany. The federal government agreed to cover half of related costs to compensate local transport operators for potential income losses; the other half will be funded at Länder level. The precise cost of this measure is yet unknown. The Deutschlandticket is an important step towards making train trips more financially competitive for citizens. This initiative is welcome and should also considerably help simplify the tariff structures of local public transport. In addition, public transport services need to become more reliable, better developed in low-density areas and more easily accessible for disabled travellers, the elderly and young children. A systematic expansion of park-and-ride facilities could help fill the missing links.

Germany’s National Cycling Plan 3.0 includes many good measures, but implementation will require increased funding to build a coherent, high-quality network without weak links in the chain. Some additional funding at federal level has been provided by a special programme for urban and rural areas within the Climate Action Programme 2030. However, within the scope of its constitutional possibilities, the federal government could consider participating to an even greater extent. For example, it could help build cycle tracks and provide targeted support to Länder to encourage development of a spatially coherent, safe and comprehensive bike lane network.5 Cycle infrastructure planning must also become faster and easier for Germany to achieve its vision for “more, better and safer cycling” (BMVI, 2021[69]).

1.3.3. Greening the system of taxes and charges

Germany’s environmentally related tax revenue (ERTR) has declined following a peak in 2003 in the context of the eco-tax reform (OECD, 2012[53]). The tax-to-GDP ratio and the share of ERTR in total tax revenues are both far below the OECD Europe average. While Germany has decoupled GHG emissions from economic growth, the current ERTR downward trend is not driven by a decrease of environmental pressures. Tax rates are poorly aligned with the polluter pays principle. Excise duties on energy products have remained virtually unchanged during the past decade. Moreover, tax rates are typically levied in nominal terms (e.g. per litre of fuel). In line with good practice in many northern European countries, Germany should consider introducing annual inflation adjustments to prevent further devaluation of ERTR. This could be introduced at a timely moment when energy prices are no longer skyrocketing.

As in other OECD countries, energy represents the lion’s share of taxes in Germany, followed by transport-related tax revenue. Taxes on pollution and natural resources are virtually absent (Figure 1.25). Waste streams and water resources are mainly managed at the subnational level through a complex system of local fees and charges. While the OECD PINE database accounted for 234 biodiversity-relevant economic instruments across the OECD area in 2021, Germany recorded only a single economic instrument for promoting conservation and sustainable use of biodiversity (OECD, 2021[70]). As highlighted in the 2012 OECD Environmental Performance Review, Germany has significant scope to expand use of payments for ecosystem services and other market-based instruments (OECD, 2012[53]). Germany could also make stronger use of environmentally motivated subsidies to foster biodiversity conservation. In this regard, the Federal Action Plan on Nature-Based Solutions could become a game changer by raising Germany’s biodiversity ambition to an entirely new level (Section 2.3.4).

Figure 1.25. Environmentally related tax revenue has been shrinking

Taxes on energy use and carbon pricing

Close to 90% of Germany’s GHG emissions are priced, but carbon prices vary and are low in non-road sectors (Figure 1.26). Introducing a common carbon price floor across sectors would improve the effectiveness of abatement decisions (OECD, forthcoming[3]). Moreover, Germany would need to further reduce the number of exemptions and expand carbon pricing to sectors that are not yet covered. The country joined the European Union Emissions Trading System (EU ETS) in 2005, which covers about half of national GHG emissions. The new agreement on the EU Carbon Border Adjustment Mechanism (EU CBAM) will help reduce carbon leakage and should thus be followed by phasing out free allocation in the industry sector.

Figure 1.26. Emission pricing coverage is significant, but levels are uneven

In 2021, the federal government introduced a national ETS (nETS), mainly targeting the transport and heating sectors (Box 1.13). This is commendable as only a few European countries have started pricing non-ETS sectors. Furthermore, it anticipates the introduction of an EU-wide system under the Fit-for-55 initiative. However, the starting level of the national carbon price was low (EUR 25 per tonne of CO₂). The national carbon price for transportation and buildings will be raised from EUR 30 per tonne of CO₂in 2022 to EUR 55 in 2025; in 2026, auctions will be introduced alongside a price collar of EUR 55-65 per tonne of CO₂. Higher levels would be needed to decarbonise non-ETS sectors effectively, particularly buildings (OECD, forthcoming[3]).

Box 1.13. Germany’s national emissions trading system for transportation and buildings

To accelerate progress towards Germany’s climate targets in the non-ETS sectors, the federal government introduced a national emissions trading system (nETS) in 2021 for emissions from road transport and buildings, which are not covered under the EU ETS. The nETS covers all fuels that fall under the Energy Tax Act, including petrol, diesel, heating oil, natural gas, liquefied gas and non-sustainable biomass. It applies the "cap and trade" principle. Distributors of energy products (e.g. petrol stations) have to pay certificates. The price of these allowances is then transmitted to consumers (motor fuels for motorists, heating fuels for homeowners) when they purchase fuel in line with the polluter pays principle.

A fixed price of EUR 25 per tonne of CO₂was set for 2021, with a clear trajectory of future stepwise price increases to 2026 when auctions will start (Table 1.4). Unlike excise taxes, which tax diesel at lower rates per tonne of CO₂ than petrol (OECD, 2022[71]), the scheme applies the same carbon price per tonne of emitted CO₂ irrespective of the fossil fuel source or the sector. This corresponds to a price increase of 7.9 cents per litre for heating oil and diesel, 7 cents per litre for petrol and 6 cents per 10 kilowatt hour for natural gas (EEB, 2022[72]). Revenues from the nETS flows into the Climate and Transformation Fund (Section 1.1.3).

While the nETS was effective in raising additional revenue (EUR 7.2 billion in 2021), its climate mitigation impact remains to be analysed. Ex ante studies anticipated a limited role in reducing emissions due to the weak elasticity of demand (e.g. people still need to heat their homes). To raise social acceptability, the nETS was accompanied by social balancing measures such as an increase of the commuter allowance and social housing benefits.

The level of the carbon price is still much lower than the equivalent carbon pricing through excise tax. The emission cap would need to be aligned with the emissions reduction targets. Moreover, to ease pressure in the context of soaring energy prices, the federal government decided to freeze the step increase in 2023. Providing a long-term perspective on carbon pricing with reliable, predictable increases will secure private investors. The experience of the nEHS could provide lessons for a broader EU scheme to cover non-ETS sectors at European level. Germany would benefit significantly from such an expansion.

Source: (EEB, 2022[72]) and (OECD, forthcoming[3])

Year	Carbon price per tonne of CO₂
2021	EUR 25
2022	EUR 30
2023	EUR 30 (freeze of increase)
2024	(EUR 35)
2025	(EUR 45)
2026	EUR 55-65, auction starts

Source: (Federal Ministry of Justice, 2023[73])

Renewable Energy Sources Act Surcharge

In response to soaring energy prices, the federal government reduced the Renewable Energy Sources Act Surcharge (EEG levy) to zero, six months earlier than planned. This generated a cost of EUR 6.6 billion, which was covered directly by the Climate and Transformation Fund. The EEG levy was completely abolished as of 1 January 2023. Electricity suppliers were legally required to fully pass on this reduction to end consumers, who gained 3.72 cents per kilowatt hour (kWh) on their respective electricity bills. The abolishment of the EEG levy relieved some pressure from households and energy-intense industry. However, electricity prices remained high, maintaining incentives for energy savings. On average, households paid 40 cents per kWh in the second half of 2022, compared to 32.16 cent per kWh in 2021 (Wehrmann, 2023[74]). The feed-in tariff was initially introduced in 2000 to subsidise the expansion of solar, wind, biomass and hydropower plants to cover the difference between the market price and the market premium paid to electricity producers. The scheme was reformed several times and contributed significantly to financing renewable energy development. In turn, it also placed a significant burden on electricity consumers. Germany’s average retail price of electricity is among the most expensive worldwide.

Gas and electricity price brakes

In 2022, the federal government announced a EUR 200 billion energy relief plan, including gas and electricity price brakes. The price caps apply to all households and businesses in Germany from January 2023-April 2024. For households and small and medium-sized enterprises, the cap is fixed at 80% of the previous year’s energy consumption. For industry, the cap is applied at 70%. In practical terms, this means that 70% or 80% of energy consumption will be subsidised, while the remainder will need to be paid at market price. These measures aim to shield all households and businesses against soaring energy prices while maintaining incentives for energy savings, which is commendable. Still, more precise targeting would not only avoid social hardship but also considerably limit fiscal costs (Kalkuhl et al., 2022[75]). Therefore, the federal government should develop a targeted and socially just transfer system to mitigate high energy costs through time-bound support that is disconnected from energy consumption levels. A more suitable cash-transfer system is being developed at the federal level. Implementation will require stronger administrative capacities and a better understanding of vulnerabilities (OECD, forthcoming[3]).

Transport-related taxes and charges

Vehicle taxes

Germany’s large preference for car ownership is reflected in its tax system. The level of transport-related taxes is far below the OECD average (Figure 1.25). Germany is one of the rare countries that does not tax vehicle purchase or registration. For the majority of passenger cars, the annual motor vehicle tax is assessed mainly based on CO₂ emissions. As of 2021, newly registered cars with high CO₂ emissions are charged an increased tax while EVs are exempted. This climate component in vehicle taxation should be further amplified. It could be complemented, for example, by a registration tax for heavy vehicles, as practised in other OECD countries (e.g. Denmark, Norway). Higher costs for polluting vehicles would also help accelerate the shift from road to rail. In many cases, federal support sets the wrong incentives at the expense of sustainable transport modes (e.g. company car privilege, commuter allowance).

Germany’s transport-related carbon tax base is set to shrink. With the ongoing electrification of vehicles, revenues stemming from taxes on motor vehicles and motor-vehicle fuels will drop sharply in the next decade. In addition, new vehicle emissions standards at the EU level are under discussion. If plans go through, this would ban the widespread sale of petrol and diesel cars and vans in the EU-area by 2035, and thus further decrease transport-related tax revenue. While the gradual erosion of the carbon tax base could be partially mitigated through scheduled increases of carbon tax rates (OECD, 2019[76]), it makes sense to prepare a more sustainable transport-related tax system. Therefore, the federal government should consider making stronger use of road pricing to make drivers pay more directly according to use and damage. The introduction of a place-based road use tax system, with tax rates depending on where and when the driving takes place, and on the type of vehicle being used, would be welcome. This could help Germany shift towards a self-sustaining, environmentally and sustainable vehicle taxation system.

Company car privilege

Company cars, which represent more than 60% of all new passenger cars, continue to benefit from a low taxation rate for private usage (1%). In practice, company car privileges have been used as a recruitment incentive. This has led to the purchase of heavier, more emissions-intensive cars in the premium segment, mainly benefiting the German car industry. As a result, higher-earning employees were often provided with a bigger car than they would purchase for themselves. In addition, companies often provide fuel cards and usually cover running costs, which are also tax-deductible. This makes company cars cheaper than the use of private cars. Forgone tax revenue was estimated at EUR 3.1 billion in 2018 (UBA, 2021[77]).

Commuter allowance

Similarly, the commuter allowance encourages users to pursue regular long-distance travel rather than providing targeted, time-bound support for developing viable alternatives. In the context of the nETS, it was further increased in 2021 until 2026, including a mobility premium for low-income employees. As of 2022, anyone travelling more than 20 km to work can deduct 35 cents per km from his/her income tax. The allowance had a fiscal cost of EUR 6 billion in 2018 (UBA, 2021[77]). For over a decade, the commuter allowance disproportionally benefited medium and higher income groups and people who drive to work; the subsidies remain insufficiently targeted and thus inefficient; from an environmental viewpoint, they are harmful and should be replaced by more targeted support for people in need, privileging public transport.

Road pricing

Little progress has been made on developing a fair and efficient road pricing system, with the exception of heavy goods vehicles, which have paid a toll (LKW Maut) since 2005. Following a failed attempt in 2015 to broaden use of road charges,6 the LKW Maut may eventually be expanded to all heavy goods vehicles (3.5 tonnes and more) in 2024. To date, Germany does not apply any tolls for passenger cars on German highways. A nationwide toll system for all motorway users, including passenger vehicles, would be a first step towards sharing the financial burden of road maintenance, infrastructure development and other externalities, which represent a significant cost for society. Urban toll rings with environmentally differentiated rates could reduce traffic during peak hours, air pollution and related health risks.

1.3.4. Removing potentially perverse incentives

While Germany provides substantive financial assistance and tax concessions for environmental and climate protection, it undermines the effectiveness of measures through exemptions and many perverse incentives for environmentally harmful activities. This contradiction between positive and negative measures has been aggravated over time; the amount of environmentally harmful subsidies has been growing during the past decade. Subsidies with negative effects on the environment were estimated at EUR 65 billion in 2018 compared to EUR 48 billion in 2008 (UBA, 2021[77]). Nearly half of these subsidies are related to the transport sector, followed by close to 40% in the energy sector, 9% in agriculture and 5% in buildings. Germany should improve policy coherence to counterbalance this trend. Phasing out environmentally harmful subsidies would reduce the massive burden on public budgets and thus gain additional budgetary scope for environmental and climate-friendly measures. The Ministry of Finance has already produced 28 issues of its subsidy report with an increasingly climate-focused narrative. This provides a good starting point for advancing the phase-out of already identified harmful subsidies.

In 2021, the bulk of support measures benefited the industrial and agriculture sectors (55% of total support estimates (TSE), the electricity generation sector (23% of TSE) and the production sector (14% of TSE) specifically those related to coal (OECD, 2023[78]) (Figure 1.27).

Fossil fuel support

Within its G7 presidency, Germany facilitated the building of a common understanding of “inefficient” fossil fuel subsidies. G7 countries committed to end inefficient subsidies for oil, gas and coal by 2025.

In practice, progress has been slow. While hard coal subsidies in Germany were phased out by 2018, consumer subsidies for fossil fuels are on the rise again with the energy crisis, especially in Europe. Temporary fuel price cuts in Germany (30 cents per L for petrol and 14 cents per L for diesel) were among the highest in the OECD area. They reduced the effectiveness of climate policy (e.g. nETS) and weakened incentives to reduce energy use. Many measures are poorly targeted and should be time-bound and consistent with the transition to carbon neutrality.

Germany also has long-term subsidies, which are no longer justified on economic or social grounds. For example, diesel is still taxed less than petrol despite stronger air pollution impacts. Revenue forgone from the diesel discount was estimated at EUR 7.3 billion in 2019 (Transport & Environment, 2020[79]). In terms of fuel consumption in the same year, the share of diesel (38.4 billion L) is nearly twice as high as the share of petrol (21.8 billion L). The federal government could capitalise on new political momentum as the German car industry becomes more supportive of phasing out the diesel tax privilege in a bid to unlock the rollout of EVs.7 Germany still has “a long way to go before achieving a sustainable fiscal policy that systematically promotes environmental and climate protection and systematically takes environmental concerns into account in all government revenue and expenditure decisions” (UBA, 2021[77]).

Support for agriculture

Little progress has been made in phasing out potentially environmentally harmful support in agriculture. Recent initiatives failed to phase out diesel subsidies and abolish the exemption of agricultural machinery from the annual road tax due to strong resistance by farmers’ organisations. A federal programme for energy efficiency in the agricultural sector aims to reduce and ultimately avoid carbon emissions in stationary and mobile energy use in the agricultural sector.

1.3.5. Towards a budgeting system for sustainable development

Green budgeting has been absent in the German debate for a long time. To date, Germany does not systematically provide information on the environmental and climate impact of individual budget measures. (OECD, 2019[80]). A stronger focus on impact assessment would improve the efficiency and effectiveness of public finance. The 2022 spending review lays the groundwork to increase the focus on performance-based budgeting for sustainable development, which the federal government intends to develop in the coming years under the leadership of the Ministry of Finance. It aims to link more clearly sustainability aspects with the federal budget using a system of “signalling, tagging and analysing”.

The approach taken by the federal government is ambitious. In future, activities funded under the federal annual budget should be explicitly linked to sustainability targets in budget allocations and budget plans of the line ministries. The “signalling” phase makes sure that targets are clearly defined and explicitly connected to the SDGs and Germany’s six transformative areas in the early planning of a given activity. Tagging is used to make the contribution of programmes and policy measures to specific SDGs or transformation areas more transparent and link it to the federal budget database. The analysis aims to improve the measurement of the effectiveness and efficiency in achieving sustainability goals. It also increases accountability of progress towards sustainability goals and other international commitments. Gender impacts must also be considered. A centralised co-ordination ensures coherence across different sectors when classifying projects and reporting on outcomes.

BMUV and BMZ will participate in a pilot to test the proposed signalling and tagging system in the preparatory phase of the 2024 budget exercise. Other ministries could join the pilot phase to familiarise themselves with the new system and collect experience.

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[24] Welsh Government (2021), National Transport Delivery Plan 2022 to 2027, Welsh Government, Cardiff, https://www.gov.wales/national-transport-delivery-plan-2022-2027.

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Notes

← 1. The effects of organic farming on a global level are less clear-cut as lower average yields also means that more land will need to be drawn into agriculture and thus reduce the potential of carbon sequestration.

← 2. The European Green Deal (2020) sets out the main policy initiatives of the European Commission to help Europe become a climate-neutral continent by 2050. The Fit-for-55 package, part of the European Green Deal, was released in two parts in July and December 2021. It includes drafts of EU climate and energy legislation to support its climate objective of reducing greenhouse gas emissions by at least 55% in 2030 compared with 1990 levels. The REPowerEU (2022) is the Commission’s response to global energy market disruptions following the Russian war in Ukraine. The EU CAP lays out the priorities of the new Common Agricultural Policy for 2023-27.

← 3. Germany is well advanced in the area of effective co-ordination, data sharing without obstacle and conformity of network services. However, it needs to make further progress in improving the conformity of metadata, spatial data sets and increase the accessibility of these data (EC, 2022[32]).

← 4. The landlord’s cost participation obligation is calculated using a ten-stage model, with values ranging from 0-90%: the higher the CO₂ emission of the building, the higher the share of the CO₂ costs that the landlord has to bear.

← 5. Around 19 000 km of cycle tracks run along federal highways. In 2016, the federal government is providing around EUR 98 million for the structural maintenance and enlargement of this network.

← 6. The proposed measure targeted only users of foreign cars. Cars registered in Germany were set to benefit from a deduction of the road charge from their annual vehicle tax bill. This 1:1 deduction of the vehicle tax from the road charge would lead to a de facto exemption from the charge for cars registered in Germany. The European Commission launched an infringement procedure against the introduction of this discriminatory PKW-Maut.

← 7. “Wenn der Umstieg auf umweltschonende E-Autos gelingen soll, kann der Verbrennungsmotor Diesel nicht auf alle Zeiten weiter wie bisher subventioniert werden“ [“If the changeover to environmentally friendly e-cars is to succeed, the diesel combustion engine cannot continue to be subsidised forever as it has been up to now“], declared CEO VW Müller in 2017, www.faz.net/aktuell/wirtschaft/auto-verkehr/vw-chef-matthias-mueller-rueckt-von-diesel-subventionen-ab-15333904.html.

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