Vote25 - Next German government must reconcile industrial decarbonisation and competitiveness

***Please note, this analysis is part of CLEW's 2025 preview series, covering the German national election and relevant climate and energy topics in Europe. Read the entire series here.***

Following a broad decline of manufacturing activity in recent years, a weakening labour market, expensive energy as a result of the Ukraine war, and widely reported troubles at VW and other carmakers, Germany is once again increasingly referred to as the “sick man of Europe.” This perception has seeped into the country’s election campaigns, making competitiveness and future industrial policy a key talking point. 

Tensions with China and uncertainties about the effects of Donald Trump’s second U.S. presidency are only compounding the uncertainty, as the Republican has vowed to slap tariffs on key trade partners, including heavily export-dependent Germany and the rest of the EU.

Compounding the difficulties is Germany’s legally binding 2030 climate target of reducing emissions by at least 65 percent, and massive investments are needed to get Germany’s manufacturing sector on track for the necessary emission cuts. Manufacturing could soon overtake electricity generation as the country’s sector with the highest CO2 output. While emissions have dropped rapidly in the energy sector in recent years as renewables increasingly edge out coal, they have decreased relatively slowly in industry. Complicating matters further, public budgets are tight following last year’s budget crisis.

Some opposition policymakers have blamed the industrial woes on the outgoing government’s climate policies, which they say overburden companies and put them at a disadvantage vis-à-vis international competitors. This accusation has fallen on fertile ground in some parts of an electorate worried about their own and the country’s future prosperity. Some members of the CDU/CSU conservative alliance, which is likely to lead the next government, have occasionally played on this sentiment during the campaign.

Yet industry associations and independent experts don’t expect a U-turn in industry emission-cutting efforts under a government led by the conservatives under Friedrich Merz, who is likely to succeed Social Democrat (SPD) Olaf Scholz as Germany’s chancellor judging by current polls. Instead, they assume the new government will follow through with most of the incumbents’ industry decarbonisation policies.

“There is a certain danger of a backlash, but we must press on,” Holger Lösch, deputy managing director of Germany’s powerful industry association BDI, told a business conference in late January. “We may be a little bit stuck in a quagmire, but standing still won't do us any good now.”

Many European countries will be watching the future government’s actions closely. “When it comes to energy and industrial policies in Europe, no country is as important as Germany in contributing to defining the priorities,” Simone Tagliapietra, senior fellow at Brussels-based think tank Bruegel, told Clean Energy Wire. “The sooner Germany’s political situation has clarity and stability, the better for EU policymaking.”

Local framework conditions, local framework conditions, local framework conditions

Lösch reminded his audience that his association recently singled out green technologies such as modern power grids, wind energy, green hydrogen, and heat pumps as Germany’s best bet for future industrial success. The question over industrial decarbonisation was “not if, but how”, Lösch added, calling for additional government support. In its wish-list for the future government, the BDI calls for improving tax incentives for investments, infrastructure improvements, and lower energy prices, among other topics, but it doesn't call for slowing emission cuts.

Industry and independent experts insist that the new government must ensure planning security above all else for making decarbonisation a success story. There is a “high degree of uncertainty, which has led to low levels of investment,” Philipp Verpoort, an industry researcher at the Potsdam Institute for Climate Impact Research (PIK), told Clean Energy Wire. “Most German industry is currently just waiting and observing.”

Auto industry association VDA is also placing planning security at the top of its wish-list for the next government. Asked to name the three most important demands for the next government, the lobby group’s head Hildegard Müller told an interviewer: “Local framework conditions, local framework conditions, local framework conditions.” She added companies needed cheaper energy, lower taxes, less bureaucracy, and greater digitalisation in public administrations.

Decarbonisation is only one of many industrial challenges

Climate policies are only one of many challenges Germany’s manufacturing sector is facing, according to the country’s business community. “We face an existential threat, but the burden is not caused by the transformation alone,” Maria Rippel, who heads the country’s steel association WV Stahl, said in a conference in late January. In addition to high energy costs, companies faced an unfair global trade landscape, as Chinese steel exports flood the European market, Rippel said, adding that the Trump presidency is set to exacerbate this problem.

Tagliapietra agrees that the recent geopolitical turmoil has undermined Germany’s previous formula for industrial success, and the country’s competitiveness. “The model of getting cheap Russian energy to manufacture goods which would be exported to China and elsewhere in the world, while having the security guarantees of the United States, no longer works,” he said. “In addition, the country’s superiority in a number of technologies is also being cast in doubt, starting with the automotive sector.”

European cooperation is key

Experts insist that Germany’s next government must coordinate more closely with European partners to reconcile industrial emission reductions with competitiveness. 

“When it comes to the decarbonisation of highly energy-intensive industries, I would first and foremost suggest greater cooperation and coordination within Europe,” said Verpoort. He argued that the German government should make a joint effort with European partners to restructure value chains within Europe to exploit local cost advantages, for example in renewable energy prices.

Tagliapietra also pointed to deeper European integration as a way forward. “Europe, for example, is at a comparative disadvantage with the United States, China, and many others when it comes to energy prices. One way for Europe to structurally lower energy prices – and I would say to lower the cost of the energy transition – is by having a more integrated electricity market,” he said.

Tagliapietra said a “United Europe” approach is also required in sector-specific policy interventions, for example in the automotive industry. “A national course of action would undermine the Single Market which is not in the interest of Germany. The next government has to understand this.”

The election in Germany coincides with a crucial period for the European industrial policy. European Commission president Ursula von der Leyen has put competitiveness at the top of the agenda for her new mandate. A highly anticipated strategy, the Clean Industrial Deal, is set to be unveiled in February.

Green steel controversy

The Conservatives’ election manifesto suggests that a future government under chancellor Friedrich Merz will be aware of the pitfalls of pursuing only national industrial policy, and continue a European approach. The programme says economic resilience should be strengthened together with EU partners, and it promises support for “true European Energy Union.”

On a domestic level, the programme proposes paving the way for a circular economy, new regulations and infrastructure to enable carbon capture and storage or use (CCS/CCU), lower electricity taxes and grid fees, as well as a quota for climate-neutral green steel.

In a revealing episode, the transition to green steel already caused a stir during the election campaign at the start of the year, when Merz said that “I personally don’t believe that the rapid switch to hydrogen-powered steelworks will be successful. Where will the hydrogen come from? We don't have it.” He added using clean hydrogen will make green steel much more expensive than conventional steel.

His remarks were not only rejected by current economy minister Robert Habeck, a green politician, and chancellor Scholz, but also by labour unions, steelmaker Salzgitter, and other companies in the sector, who all insisted that green steel was the sector’s only option for long-term survival.

Following the uproar, Merz clarified in a subsequent interview: “I am in favour of renewable energy and the use of hydrogen — and therefore also of green steel production. I believe in hydrogen technology.”

Germany is betting heavily on green hydrogen as a fuel for industry decarbonisation. But recent reports have suggested that initial predictions for the import of the climate-neutral gas were overblown, as shipping it over long distances is likely to remain prohibitively expensive.

Addressing an international rather than a domestic audience, Merz told the World Economic Forum that Germany’s industrial base had started to lose its competitive edge even before the current government took office in 2021 – implying the process began under a Conservative leader. Merz repeatedly stressed the importance of a unified European approach but didn’t mention rolling back climate policies. He said manufacturing continued to be the “backbone of our economy,” and promised that “every decision” of his government would be guided by restoring competitiveness.

The outgoing government’s achievements

While a Conservative-led government would implement some changes, current industry decarbonisation policies are set to continue by and large, an approach also favoured by experts.

“Keep doing it, keep building, keep supporting the projects you are already supporting!” Verpoort urged the new government. He said the current government managed to prepare the ground for industry decarbonisation in many ways, including with so-called climate contracts for Difference (CCfDs), which compensate companies for the higher costs of clean production, and with the EU’s Important Projects of Common European Interest (IPCEI), which include battery production and hydrogen infrastructure, and allow member states to support transnational projects.  

“They also did a lot to advance CO2 storage, which was really important and necessary to proceeding further,” Verpoort said, who also counted the government’s strategies for a circular economy and for hydrogen imports as achievements. The CDU/CSU opposition alliance has already said they would support changes to the carbon storage law to allow carbon capture and storage (CCS) in the country, as proposed by the outgoing government. But it remains unclear whether there is sufficient time to adopt the reform before the election.

Embracing change

Experts stress that continuing the path of decarbonisation will also imply some structural changes to Germany’s industry. “Focusing on preserving the status quo in a world that is changing at speed is a recipe for failure. Transformation must be embraced,” Tagliapietra said.

“Germany must ask itself what are its comparative advantages? Maybe there is no business case for the energy intensive industries that are there today. Maybe some of them will have to relocate or just build new factories in other countries, including in the so-called Global South,” Tagliapietra said.

Verpoort said that gloomy predictions of “de-industrialisation” during the election campaign are often overblown. “It is not ‘de-industrialisation’ if some of these high-energy activities move elsewhere in Europe, or even across the globe,” he said. “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.”

Verpoort urged the new government to focus its industrial policy on non-energy-intensive green industries such as battery-electric vehicles, heat pumps, electrolysers, and energy storage. “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.”