When it comes to German climate goals, a broad consensus in the public can quickly be found – as long as the commitments remain abstract enough. After all, no one wants to leave future generations a planet in disrepair or constantly grapple with the disastrous consequences of climate change, which brings storm surges, land loss, storms, and increased droughts. However, as soon as the discussion becomes more concrete, reactions become more differentiated and sensitive. This is especially true regarding Germany's share of emissions on a global scale. What can Berlin actually achieve? And what if other countries do not join in, thus temporarily benefiting from lower costs in competition because the high effort for transformation is avoided?

The magnitude of the task is enormous. According to the revamped Federal Climate Protection Act, Germany still needs to reduce greenhouse gas emissions by around 35% by 2030 compared to 2023. And after 2030, it must continue at this pace.

One lever for this is driving the costs down: Carbon pricing should steadily increase the cost of fossil energy so that companies voluntarily invest in energy-saving technologies or transition to renewable energies. Or they reduce their production, which is, of course, not intended but poses a real danger, as outlined in a study by the Bundesbank: If the increase in energy efficiency does not keep pace with pricing and costs continue to rise, significant production losses can occur.

For this reason, the German government is now pursuing a dual strategy and has followed up with an Energy Efficiency Act (EnEfG), which accompanies – some would say coerces – the economy in its transformation through regulatory and administrative means to take the „right“ path towards efficiency. The framework came into effect in November 2023.

The law has already drawn massive criticism during its deliberation, especially as it comes across as extremely bureaucratic. To achieve the reduction goal, companies are forced, for example, to implement energy management systems. Moreover, environmental plans and energy audits are required. All of this entails massive bureaucracy because reports need to be filed, statistics filled out, and compliance with the requirements documented. Additionally, failure to comply could result in hefty fines. For instance, if an energy management system is not set up correctly, completely, or on time, it can result in fines of up to 100,000 euros.

Ifo President Clemens Fuest has already called it a „growth killer.“ If energy is scarce and expensive, companies will invest in energy-saving technologies even without regulation, he warned. The problem is that energy efficiency cannot be increased through regulation but is the result of many technological processes – mainly the product of innovations, which are typically not predictable. And if too much is demanded or prices rise as a lever for greater energy efficiency, it leads to reduced growth, or companies relocate production to cheaper countries. Financial assistance or networks established by the federal government, as offered alongside the law, only have temporary effects – or are only helpful for companies that have no option to relocate.

Even in normal economic cycles, more bureaucracy, additional legal requirements, and higher costs are difficult to justify. In the current challenging state, they exacerbate the situation, almost acting toxically. Additionally, the requirements are very ambitious and not easily or not at all achievable within the set timeframe with current technologies.

Between 1991 and 2019, the energy intensity – the amount of energy used per unit of output – decreased by almost 2% annually, according to the Bundesbank study. Meaning, economic growth was possible without using more energy. However, the Energy Efficiency Act requires a much greater reduction in energy consumption over the remaining six years. If energy efficiency were to progress at the previous rate, GDP would have to decline significantly afterward to achieve the reduction goals, which would hardly be acceptable to the public.

Alternatively, energy efficiency could increase to unprecedented levels. But this seems unrealistic. The rate of progress would have to increase by two and a half times in each sector, which has only been achieved in individual years and sectors so far, the Bundesbank admits.

To achieve the goal nonetheless, the Bundesbank considers further climate policy measures unavoidable. It considers carbon pricing too mild. „It seems questionable whether the current CO2 price path creates the necessary incentives“, it says. Under the current conditions, emissions are expected to decrease by only 15.7% relative to 2023 through the price on emissions. An additional 19.2% would have to be achieved „with stricter climate policy measures such as a stronger increase in the CO2 price“.

However, according to model simulations, this could „lead to production losses for a certain period“, economists concede. The statement suggests that accompanied by faster technological progress in energy efficiency, a higher carbon price could subsequently lead to increases in production. Higher energy efficiency aids in development, reduces energy costs, and production recovers significantly despite a fairly steep carbon price path. But this is likely just a hopeful scenario for now. For many companies, fleeing abroad may seem easier than hoping for further progress.