Vote25: Next German government should focus on EU cooperation in industry decarbonisation - researcher
***Please note, this interview is part of CLEW's 2025 preview series, covering the German national election and relevant climate and energy topics in Europe. Read all interviews here.***
Clean Energy Wire: The state of German industry has become a contested election issue. Some parties point to the steady decline of manufacturing in recent years, and fan fears of broad industrial decline, and even “de-industrialization”. How would you describe the current condition of heavy industry in Germany?
Philipp Verpoort: German industry is currently facing three major problems. One is the cost of energy, which is particularly important for energy-intensive industries such as steel and chemicals, and less so for say, the automotive industry. The second problem is the increase of carbon pricing, and the phase-out of free allocations in the European Emissions Trading System, combined with the uncertainty over whether the EU’s carbon border tax (CBAM) [which forces importers of products like steel or fertiliser to pay a fee if their product has a higher carbon footprint than their counterparts made in the bloc] will have the desired effect or not. The third problem is the fact that the German industry has been highly reliant on exports, which causes trouble in the current geopolitical situation, especially regarding China and the U.S.
And how would you summarise the state of play in Germany’s industry decarbonisation?
We’re pretty much at the start. The major sectors to decarbonize are the steel, chemical, and cement industries. In the steel industry, we're only just starting to build the first direct reduction furnaces that can already avoid most emissions by using natural gas instead of coal, and that can go to very low emissions with clean hydrogen in the future. But we don't have a supply of clean hydrogen yet. In the cement industry, we're only just starting to retrofit cement plants with carbon capture, but there is no CO2 pipeline infrastructure in place, which we will eventually need – we don’t even have a concrete plan for building it yet! And finally, in the chemical industry, there is not even a clear transformation path yet. So, a lot of challenges remain.
We’ve also made only slow progress in transforming industrial heat in general, even though it should be relatively easy. Both lower temperatures and steam production are simple to electrify, and higher temperatures are also very much possible with advanced technologies like induction furnaces or microwave heaters. I think that's something the industry needs to really focus on in the next five years.
Some parties argue that we should slow decarbonisation in order to give industry a breather. How do you react to this suggestion?
You only need to look at some other countries, especially China, which is moving very fast in growing green markets, and producing green technologies. We’ve already lost the race to China in solar PV, battery production in general, and now also in battery-electric cars. The US is also moving forward, despite Trump. He is a businessman, after all, and he is seeing that some parts of the US are making large profits with renewables. Slowing down our efforts now just means we will lose pace, and we’re not going to be able to catch up with others. A decarbonised industry is the future, whether we delay it by five years in Germany or not.
Another challenge for the German industry is the high degree of uncertainty, which has led to low levels of investments. Most German industry is currently just waiting and observing, as there seems to be such a lack of clarity. A prolonged period of time without investment can be dangerous for industry. If the German government or the EU now backtrack on confirmed climate policy, this will only create even more uncertainty. What the industry needs right now is commitment and clarity from the German government on what had been agreed upon in the past.
What should be the priorities for the next German government to advance industry decarbonization, while also avoiding economic decline?
In very general terms, I would urge the new government to focus on non-energy-intensive green industries, such as battery-electric vehicles, heat pumps, electrolysers, energy storage – both batteries and heat storage – regulation and control systems like smart meters, electronic devices, computer chips etc. This is where most jobs and value creation will be. Plus, Germany has better competitive advantages in these industries because they require less energy as input.
When it comes to the decarbonisation of highly energy-intensive industries, I would first and foremost point to cooperation and coordination within Europe. We could organize Carbon Contracts for Difference (CCfDs) on a European rather than on a German level, to foster efficiency across the continent. For example, if we already know that renewable electricity will be very cheap in Sweden and in Spain, but not so much in Germany, we should discuss to what extent it might be advantageous to locate parts of highly energy-intensive processes in those countries. This is partly happening already today. In the first auction for the European Hydrogen Bank, German bids for the production of green hydrogen were not successful, because electricity costs are higher than on the Iberian Peninsula and in Nordic countries.
Of course, we also need to push forward projects that have already been started, like those classified as IPCEIs [Important Project of Common European Interest]. I can only say: ‘Keep doing it, keep building, keep supporting the projects you are already supporting!’
But there is one exception to this rule: The new government should reconsider some of the planning for a hydrogen core network. For example, I doubt that we really need all the connections to plants that are meant to produce ammonia. It's already becoming increasingly obvious that a global green ammonia market will emerge in the 2030s, and that German plants will likely struggle to compete on this market. That’s also why some of the scenarios for future hydrogen demand are exaggerated. We need to be a little bit more realistic. How much will really materialise — both on the demand and on the supply side? What can companies really expect? We will need much less than most of the scenarios predict, because we cannot and probably also don’t want to replace all the natural gas we currently use with green hydrogen. However, I also want to emphasize at this point that even if Germany needs much less than some projections suggest, it's still a huge amount!
I would also recommend the new government to be cautious in promising energy subsidies. This may be helpful in a few instances, but it has to be clear that this is a transitional measure, not a permanent one. German industry needs to understand that German electricity prices will be higher compared to elsewhere for the foreseeable future. Therefore, it could make more sense for the government to support industrial growth by reducing bureaucracy, or by helping to find skilled workers, for example. If the German government does decide to provide subsidies on energy costs to energy-intensive industries, it should not be used to universally lower the wholesale electricity price. Instead, incentives for efficiency and demand flexibility should be retained.
How would you evaluate the achievements of the outgoing government with regards to industry decarbonisation?
They did manage to make progress in many ways. Both CCfDs and the IPCEIs are steps in the right direction. They also did a lot to advance CO2 storage, which was really important and necessary to proceeding further. The economy ministry also presented a circular economy strategy, and a hydrogen import strategy. H2Global also recently awarded the first green hydrogen import contract to an ammonia project in Egypt. This auction was funded through the German government – so things are moving forward.
Do you believe that some degree of German de-industrialisation will be unavoidable in the longer run as a result of decarbonisation?
We need to deconstruct the narrative of de-industrialization in Germany. If you look at the structure of German industry, we have a lot of industrial production with a very high value added, but a very low share of energy costs, and thus also a very small share of emissions. The emissions and the energy consumption – be it fossil or renewable – is highly concentrated in a few very energy-intensive sectors. Basically, it comes down to the steel industry, the chemical industry, the cement industry, and production of some other metals such as aluminium. Within those industries, if you zoom in further you realise that, yet again, energy use, and therefore emissions, are concentrated in very few places. In the steel value chain, for instance, most of the emissions come from the blast furnaces. But what really matters for the steel quality are downstream production steps such as steel finishing, which are not extremely energy-intensive.
It is not “de-industrialisation” if some of these high-energy activities move elsewhere in Europe, or even across the globe. From the whole spectrum of industries, only a small share is heavily affected by the energy transition. Carmaking can remain in Germany, and mechanical engineering also will. Even if extremely energy-intensive production steps move abroad, you keep the rest of the value chain here, to produce specialized goods.
But if this is the case, should the new government still support steel decarbonisation projects?
There is a risk that we overestimate the present challenge, and underestimate the future challenge. We should continue to build the green steel plants that are already underway in Germany, which will run first with natural gas, and later with green hydrogen. In the transformation of the global steel industry, we are facing a major bottleneck in these low-emission direct reduction furnaces. So even if these plants have higher energy costs, I would still expect them to be profitable for the next 15 years or so. A global green iron market will emerge only slowly. Before it becomes a reality, German industry will not have to compete against other global green iron suppliers.
Whatever we're pushing for now, it’s taking us in the right direction. But we also have to make sure that we have the right long-term strategy. For instance, it won’t be feasible to transform all steel plants in Germany. A problem in many discussions about industry decarbonisation is what I would call structural conservatism – The desire to keep everything we have now, for example by replacing all the natural gas we use today with green hydrogen. But green energy prices in Germany will not be able to compete with places like Namibia or Australia. If you don’t relocate some energy-intensive processes, in the longer term you are looking at permanent subsidies of between 5 and 15 billion euros per year for steel, fertilisers, and ethylene alone to keep them competitive.
But won’t basic industry relocations produce new dependencies, which policymakers definitely want to avoid in the current geopolitical context?
First of all, these production processes could also stay in parts of Europe with cheap green energy. That's why I was saying earlier that we need to talk to our European partners about how we could restructure value chains. For example, we could produce ammonia in Spain and then ship it to Germany, instead of transporting hydrogen to do it here.
And secondly, it will probably be much easier to diversify supply on future global green product markets, because they are set to become highly diverse. That's because everyone can buy solar panels, and sooner or later, everyone will be able to buy an electrolyser and put it somewhere, and then just make hydrogen and do something with it. Renewable resources are also much, much more broadly scattered across the world than fossil fuels. Therefore, we're going to see a lot more countries enter green energy markets than we have seen with fossil fuels, which are highly concentrated and require a lot of technical know-how to extract. This will automatically make us less dependent.
