Will 2021 German elections impact Europe’s Climate Agenda? Who will pay for it?

November’s COP26 Summit in Glasgow, rather like the Greek god Atlas, holds the weight of global climate expectations on its shoulders. Unfortunately, we can expect many governments to drop the ball when it comes to taking the latest warnings of UN climate scientists seriously. Just a few weeks before the autumn climate conference, the German federal elections on 26 September will mark the end of Europe’s summer scarred by the extremes of climate change. Extraordinary heat waves and wildfires have left parts of the Mediterranean scorched. Many homes in the towns and villages along the German-Belgian border have been washed away. For far too many people, only the pain and grief of their loss was left behind once the waters subsided.

There is a „climate change“ in Germany’s election campaign

Tragically the floods have made the issue of climate change a significant talking-point for the leadership challengers who want to succeed Angela Merkel’s 16-year chancellorship. But perhaps not in the way one might expect. With the Social Democratic Party (SPD) having surpassed the Christian Democratic Unionists (CDU-CSU) in polls for the first time in 15 years at the end of August, the chancellor candidates are increasingly trying to differentiate themselves – especially on climate policy. For example, the CDU’s candidate, Armin Laschet, has doubled-down on the traditional conservative pro-industry view by warning of social upheaval from pursuing the green transition too quickly. It remains to be seen if this stance backfires given that the summer floods largely occurred in his home region North Rhine-Westphalia.

This clearly marks a shift in German election campaigns since climate policy has not been a leading factor in German leadership contests in the past. Non-Germans have often overestimated its impact on German politics, a perception that has been fuelled by the fact that no other European country has seen a green party play such a prominent role in national and regional politics since the 1980s. However, despite having presented the most concrete concepts for a low-carbon transition in all past elections, and a strong economic track record both in federal government and at Länder level, especially in the economic power house of South-West Baden-Württemberg, voters seem to associate the (necessary) economic policy skills and the ability to appreciate what the green transition would mean for German workers in heavy industry sectors with other parties than the Greens.

So, what are the climate priorities for the five leading German political parties? And, even more importantly for us at Climate & Company, how do they plan to pay for the green transition? Does sustainable finance appear at all within each party’s green vision?

German Party Positions on Sustainable Finance in the 2022 elections

The CDU-CSU (Christian Democratic Union) – Ambitious enough to lead Europe into a more sustainable future? 

Looking back, the CDU’s long-term leader Angela Merkel has made the reflection that she’s achieved a lot for the climate agenda – but probably not enough. More concretely, the CDU has often been criticised for blocking ambitious climate action. In a recent blow to the government, the German Constitutional Court decided in a historic case led by Fridays for Future Germany that the German leadership needs to become more ambitious in its climate policies to provide climate-safe living conditions for future generations. This judgment is to be seen against the backdrop of the CDU’s reluctance to reduce Germany’s dependence on fossil fuels such as coal more quickly. In their campaign programme, the CDU-CSU re-emphasised their traditional ties to Germany’s industrial base which is reflected in Armin Laschet’s goal to aim for an economy-friendly climate policy. Their three climate pillars focus on levelling the playing field for EU industry by establishing a carbon border mechanism for Europe (the CBAM); an emission trading system and general support for innovation and technology. The aim is to reach climate neutrality by 2045 as a means of boosting Germany’s competitive advantage, with an emission reduction target of 65% by 2030. On sustainable finance, the party can be criticised for a lack of commitment with some suggesting it has not yet fully captured the financial relevance of Environmental, Social and Governance criteria and environmental performance for business in Germany, Europe and beyond.

The SPD (Social Democratic Party) – Emancipating from a short-sighted grand coalition?

The German Social Democrats have always been more comfortable wearing the cloak of green politics than their Christian-Democrat counterparts, especially during the SPD’s past coalition with the Green Party under chancellor Gerhard Schröder from 1998 to 2005. However, in the SPD’s past 8 years of co-government with the CDU, many of their environmental efforts have been diluted internally (e.g. by the influential pro-coal SPD faction from North-Rhine-Westphalia) or overshadowed and blocked by the CDU. Undoubtedly, the SPD is left with close to net-zero green credibility.

With climate change emerging as a top-priority for German voters, the SPD has  also hopped on the climate bandwagon – and it comes as no surprise that a socially-just green transition is central to top candidate Olaf Scholz’s vision for the coming government: the SPD doesn’t want low and middle-income households to be burdened by climate policies. This includes measures such as sparing low-income households from paying a higher CO2 price and providing subsidies for buying an electric car. In general, the Social Democrats prioritise the greening of the energy sector through renewable energies and hydrogen technology. On the sustainable finance front, the SPD plans to direct government funds towards sustainable products through more sustainable bonds and by abolishing subsidies harmful to the climate and the environment. If they stick to their word and avoid entering another CDU-led coalition, while sidelining the party-internal coal lobby, they might stand a chance to show their ‘true’ green credentials – either in government or in opposition.

Alliance 90/The Greens – Juggling with high expectations and a first-time chancellor candidate

For the first time since entering the Bundestag in 1983, the Green Party has put forward a candidate for chancellor, Annalena Baerbock, who has however lost ground in the polls due to what many see as a poorly managed election campaign – but also due to personal attacks, many of them aimed at her being a woman and a young mother. Still, the Greens clearly aim for a seat at the government table – and they probably have a chance to do so either with CDU or SPD. Their party programme foresees stepping up Germany’s green investment efforts with an extra green investment budget of €50 billion a year whilst loosening the debt limit – the latter adamantly opposed by the CDU but increasingly supported by members of the SPD as well. The Greens aim to increase the CO2 price from 25 Euro to 60 Euro – for transport and heating already in 2023. Furthermore, the certificates from the European Trading Scheme (ETS) shall be reduced to support a strong carbon price and its clear price signal in favour of greener (and hence less-carbon costly) ways of doing business. The Green party has, surprisingly, not received the expected boost in support after the catastrophic events in Western Germany in the summer, as the electorate turns toward older male candidates like SPD’s Olaf Scholz as their preferred crisis managers.

The Free Democratic Party (FDP) – potential king-makers with an ETS to solve it all

Just like in 2017, the liberal FDP could turn out to hold the crown, even if it will most certainly not get to wear it. While the Greens put forward a mix of instruments to tackle the climate crisis, the FDP puts all its eggs in one basket: the centre piece of their climate program is the Emission Trading System (ETS).  As traditional free-marketeer, low tax and small government advocates, they are once again betting on the force of the invisible hand for a ‘green reset’. The FDP envisions an ETS for all sectors with a price set by the government, backed up by an international system to prevent carbon leakage with the aim of incentivising innovation and competition. This “keep it simple” approach seems to ignore the variety of market failures which effectively mute the ETS’ price signal in certain sectors, and which are the reason behind the EU’s more diversified tool box. Their party programme, despite remaining vague on clear targets, calls for higher investment in innovative technologies and for refraining from distorting competition through subsidies. This is a unique, stand-out policy among the parties at a time when calls for a rapid transition to electric cars is so fashionable. The FDP argues that this practice would lead to a lack of innovative options to reduce CO2 emissions. In addition, the FDP rejects a tax on carbon as well as strict regulations and levies for the industry sector in general. While the Liberals recognise the power of financial markets and sustainable finance tools to address the climate crisis, they only propose a limited use of the tools sustainable finance has to offer. Observers may congratulate the FDP on their unshattered belief in market powers – but their ability to unleash them and to deliver remains to be seen.

Die LINKE – late convert from lignite supporter to climate advocate

The left party Die Linke’s chances of entering the German federal government for the first time have increased with the SPD’s rise in the polls, despite their own historically low support rates. However, it remains to be seen how credible their relatively recent shift from a pro-coal party to a rather outspoken climate protection advocate really is. A key factor in their new green awakening is the party’s demographic transition, from former communists to younger, less ideological party members interested in d redistribution of wealth and equal opportunities. Die Linke could add credibility to a “fair transition”, with workers’ rights and distributional effects of climate policies in their focus. However, as far as sustainable finance is concerned, they see a limited role, reflecting their traditionally anti-capitalist stance and scepticism of market mechanisms. While Die Linke strongly supports the EU Taxonomy, they propose a radical “public good” test for financial instruments, proposing to ban those that cannot show their environmental and social benefits. Regarding public sustainable finance, they favour the quick phasing out of environmentally harmful subsidies and tax exemptions.

The new government’s foot print on the international green agenda – with “Mutti Scholz” at the helm

With days until the election, German voters are signalling with their increased backing of SPD’s Olaf Scholz, who is also the current vice-chancellor, that they’re looking for ‘leadership continuity’. Put another way, many Germans want to keep a ‘Mutti’ figure (the affectionate German motherly nickname for Angela Merkel), with Scholz as likely chancellor in any of the most likely coalitions. Only an SPD-led government, in coalition with the Greens and the left party Die Linke, would mean a huge political leap.

Looking at the international agenda, the choice of Germany’s next  chancellor and the make-up of its coalition government may barely impact on COP26 in November because the current government’s position is so embedded in Europe’s goal of climate neutrality by 2050. Those who were missing an extra push and impetus of a pro-climate German government pulling its weight at EU and UN level in the past years may be disappointed again. It is also unlikely that COP26 will welcome a new German chancellor since coalition talks may well continue into the late autumn. But beyond the summit there’s no doubt that the new German coalition government will have a powerful role in cajoling its European and international partners to step-up and meet targets.

One thing is certain: the Constitutional Court’s recent ruling to regulate the 2030 climate targets by the end of 2022 clearly sets Berlin’s course within Europe’s green recovery. For that to be achieved, the incoming government will need to be more ambitious and capture the recent recommendations of the German government’s own climate advisory body. It needs to go beyond the well-polished, but rather vague, sustainable finance strategy adopted by the outgoing government in May this year. Political promises are easy; paying for them is the hard part. If private and state finances are to be directed away from polluting sectors and heavy industries in a fair, inclusive way then the lever of sustainable finance must be used to a maximum. The private sector needs the government to show the way and provide a clear, stable and forward-looking framework.

Ambitious climate policy is primarily about a contract between today’s and tomorrow’s generation