Part 1: A Paler Shade of Green

German car manufacturers face serious problems meeting European Union emission guidelines and the planned nuclear power phase-out will require massive investment in renewable energies or a turn toward abundant, but dirty coal.

Germany is in a good position to make a transition to a more energy efficient and more climate-friendly economy. Since the unification of East and West Germany in 1990, Germany has reduced its carbon emissions by more than 20 percent, while other countries’ emissions have surged. This decrease, however, is in large part due to the economic decline of emission intensive industries in the former East Germany.

The path to a “green” economy may not be as easy, nor as swift as environmentalists would like. Germany’s reliance on coal presents a big obstacle.

Energy security concerns – the desire to reduce dependence on imported gas and oil – and a host of other factors like rising energy costs, unemployment, and the unpopularity of nuclear energy have led Germany to turn to coal and lignite to generate power. Many scientists say this will inevitablyincrease national carbon dioxide emissions.

A highly profitable energy revolution

Although some argue that strict ecological restrictions will mean job losses and higher energy costs for Germany, the global energy “revolution” is already proving highly profitable for German industries and investors.

Since the 1990s, Germany has developed into a world leader in renewable energy technologies, such as wind, solar, biomass and hydroelectric. Along with a growing domestic demand, Germany exported over six billion euros worth of solar photovoltaic cells, wind turbines, and other technologies in 2006.

Meanwhile, federal and local government in Germany has taken steps to promote energy efficiency in buildings, household appliances, and transport through taxes, tax breaks, and government funding.

All of these policies may ultimately help Germany reach its goal of reducing the country’s total carbon dioxide emissions by 21 percent by the year 2012 – significantly more than the mandatory 8 percent imposed by the United Nations Kyoto Protocol. As of 2007, Germany was on track to meet its Kyoto target.

Pushing climate change to the top of the global agenda

Germany’s unique political situation in 2007 – its dual-role as president of the European Union and host of the annual group of eight (G8) industrialized nations summit – helped push climate change to the top of the global agenda.

In February 2007 German Chancellor Angela Merkel presided over an agreement by all EU nations to cut greenhouse gases by 20 percent of 1990 levels by 2020. With the economic crisis hitting Germany's export-oriented industry hard, Merkel has started to tone down her climate targets drawing criticism from EU observers and environmentalists.

Among other topics, EU officials criticized Merkel's call for weaker emission targets for European car manufacturers to improve competitiveness of energy-intensive German cars.

Part 2: Fact Sheet

Facts and figures about Germany and climate change.

GERMANY’S CARBON FOOTPRINT AT A GLANCE

Country: Federal Republic of Germany
Population: 82.4 million people
Estimated annual CO2 emissions: 945 million tons (2008)
Estimated annual CO2 emissions/per capita:12 tons CO2 (2007)

10 FACTS ABOUT GERMANY AND CLIMATE CHANGE

01. Germany produced roughly 3.3 percent of global carbon dioxide emissions in 2004 making it the biggest national emitter in Europe, which as a continent, contributes 15 percent to the global total, the fourth biggest worldwide.

02. Germany’s greenhouse gas emissions in 2007 were around 21 percent lower than levels recorded in 1990.

03. Between 1990 and 1995, CO2 emissions in Germany declined by approximately 13 percent due to the collapse of heavy industries in former East Germany. In turn, CO2 emissions from German industries rose by 5.4 percent from 2005 to 2006.

04. In a 2006 study conducted by University of Marburg researchers, 93 percent of surveyed Germans considered climate change an important issue, second only to unemployment on the list of top concerns.

05. The Berlin-based German Institute for Economic Research (DIW) said that the effects of climate change could cost German businesses hundreds of billions of euros over the next few decades, particularly in frontline sectors such as agriculture, tourism and insurance.

06. Winter tourism in Germany is threatened by climate change more than in any other mountainous country in Europe. A 4.5 degree increase would render German ski resorts virtually snow-free.

07. Coal power plants – considered the most climate-unfriendly of all forms of energy production – supplied around half of all electricity produced in Germany in 2004. Nuclear energy was the country's second-biggest supplier at 27 percent.

08. There are about 77 billion tons of lignite or brown coal left in German soil. At the current rate of mining, this would allow for around 225 more years of coal production in Germany.

09. Germany is a world leader in renewable energy technology. According to the weekly Frankfurter Allgemeine Sonntagszeitung, around one third of all the water-power installations in the world are produced by German firm Voith from Heidenheim, while every other wind turbine and every third solar cell are German-made.

10. Wind turbines supply around 30 percent of the energy needs in the northern German state of Schleswig-Holstein. The local wind industry has generated over 300 million euros of state revenue through its contributions to the national power grid, and created 5,000 local jobs over the last few years.

Part 3: Impact on Environment and Society

Critics of drastic action against climate change say countries like Germany might actually profit from rising temperatures. Still, economic, environmental and public health impacts will be considerable in Germany.

A March 2007 report from the German Institute for Economic Research calculated the potential cost of climate change for the country at 800 billion euros by the year 2050. Although the figure is disputed, it nonetheless illustrates some of the serious challenges that climate change could present in Germany.

Environment

Scientists at the Max Planck Institute said that average temperatures in Germany may increase by between 2 and 4 degrees Celsius during the 21st century. According to Germanwatch, this increase would cause a number of environmental changes in Germany, including changing rain patterns, flooding, heat waves and more winter storms, high winds and even tornadoes.

A study commissioned by the German Federal Environment Agency (UBA) used weather modeling to examine future effects of climate change in different regions throughout Germany.

In the northern lowlands, precipitation could fall by up to fifty percent this century, causing droughts and affecting farming. Agriculture and infrastructure would also be affected by increasing and more severe winter storms, such as windstorm “Kyrill” that swept across Germany in January 2007.

Other parts of Germany will see more rain, particularly in the winter. Low mountain ranges such as the Eifel, Hunsrück, Odenwald and Spessart could see 80 percent increases in winter rainfall by the end of the century. More days of heavy rain will put pressure on municipal sewage and water management systems, and will cause Germany’s northern waterways – such as the Elbe and Oder river basins – to flood more frequently.

Health

The heat wave of 2003, with about 7,000 victims in Germany, was another big wake up call. That summer’s soaring temperatures killed 30,000 people in Europe, making it the continent’s deadliest natural disaster in over a century. Recent studies suggest that such summers could “become the norm” in Europe in the coming decades.

Aside from the health impacts of heat waves, warming temperatures in Germany may enable the northern migration of insect-borne diseases, such as malaria and meningitis, and an increase in asthma- and heart-related ailments across the country. Changing rainfall patterns could also prolong the allergy season, which affects millions of Germans each year.

A study conducted by researchers at the University of Bonn found that biodiversity in Germany could change due to increases in temperature and more rainfall. Warmer parts of Germany could eventually be home to orchids and Mediterranean oak trees.

Higher temperatures will amplify the distribution of pests that destroy trees and crops. Veteran Bavarian forester and WWF “climate witness” Georg Sperber has observed that pests such as bark beetles and oak procession moths – once rarities – now thrive in German forests. Drier climates also increase the danger of forest fires and weakens a tree’s resistance to pests.

Tourism

Climate change also threatens to take a lot of the fun out of winter vacations to the Alps, melting the snow that draws millions of tourists each year to the mountains and ski resorts. According to the OECD, the German ski industry is most vulnerable of all Alpine countries: one-degree of warming would reduce the number of naturally snow-reliable ski areas by up to sixty percent.

Part 4: Strategy and Policy

German Chancellor Angela Merkel has presented herself as a global leader on climate change, but Germany is the sixth-biggest emitter of CO2 worldwide. How will the country address this imbalance?

In signing and ratifying the 1997 Kyoto Protocol, Germany agreed to cut its greenhouse emissions by eight percent by 2012, but has since set itself a more ambitious goal of 21 percent cuts compared to levels in 1990. Most of this reduction has already been achieved due to the collapse of large parts of East Germany’s heavy polluting industries after reunification.

The government even stepped up that commitment and is now aiming at reducing emissions by 40 percent by 2020. Current climate action, however, will fail to achieve this aim, finds a study from the research institute Ecofys. Without new initiatives, emissions could only be reduced by 28 percent.

National Policies

One of the biggest problems is Germany's dependence on coal. The government faces a number of political and economic obstacles in phasing out coal-fired power plants, which supply around half of the country’s electricity, but also represent a major source of Germany’s air pollution and carbon emissions.

The first challenge is meeting current and future energy demands with less coal. Unfortunately, Germany is the world’s leading producer of lignite, also referred to as brown coal - a younger, carbon-rich variety of coal with a relatively low energy level. Germany still has some 24 billion tons of more efficient bituminous, or black coal, but mining it would be too expensive at current world market prices. Brown coal, in turn, is cheap and abundant, but dirty.

Meanwhile the construction of coal plants creates jobs and generates billions of dollars of investment. In short, new coal plants are hard for politicians to resist: they provide a boost to the local economy and job market, and prevent confrontations with Germany’s powerful labor unions.

So-called CO2 sequestration might be a solution. The Swedish Energy Supplier Vattenfall is currently setting up a pilot in Brandenburg for a new sort of power plant that can produce energy without emitting any CO2. It will use extremely high-firing temperatures and a special filtering process to turn carbon dioxide into a non-gaseous form that can be stored underground.

Environmental organizations like Greenpeace, WWF, and the German Advisory Council on Global Change (WBGU) say a transition away from coal is critical to meeting ambitious emissions reduction targets.

German policymakers are also looking at a number of policy options to reduce emissions. The Renewable Energy Sources Act (2000/2004) helped promote alternatives to coal and nuclear power by demanding that power grids purchase energy from renewable sources – such as wind, solar and biomass – at low cost.

Together with the KfW Development Bank, the federal government gave out 1.5 billion euros in loans and grants in 2006 to people who wanted to make their houses more energy efficient and less carbon-intensive. In 2006, around 265,000 German houses were refurbished as a result of this scheme.

Government officials had also been discussing vehicle-based CO2 taxes. Under such a tax system, cars emitting less CO2 are less expensive than others with similar horse power. After long debates, the ruling coalition finally agreed on a system based on engine displacement and CO2 emissions that will be valid from July 2009 on.

In the meantime, the European Commission is pushing for mandatory emissions restrictions on all European car manufacturers. This would especially affect German car makers like BMW, Porsche, Audi, and Mercedes-Benz – brands known for high performance and high emissions. German Chancellor Merkel has come out against such blanket mandatory standards. But so far, most car manufacturers have failed to live up to voluntary commitments to reduce emissions.

International Policies

Germany made climate and energy a centerpiece of its dual presidency of the European Union and Group of Eight (G8) industrialized nations in 2007. Merkel presided over a landmark agreement by the 27 European nations to cut carbon emissions by 20 percent of 1990 levels by the year 2020. This commitment could rise to 30 percent if other developed nations like the United States followed suit – a rather unlikely development.

Despite the targets set in Brussels, however, Merkel admits that Europe alone cannot stop climate change. Europe is responsible for only around 15 percent of global emissions, while most of the world’s remaining emissions come from China and the United States with about 20 percent of the global total each.

While Germany may not be able to single-handedly save the world from climate catastrophe, it seeks to set an example. According to climate expert and Merkel advisor Hans-Joachim Schellnhuber, Germany and Europe could lead the massive global efforts needed to slow climate change. “If we prove now that our society can remain prosperous, productive, and creative without carbon dioxide,” he says, “then we can convince the newly industrializing countries that this is the way to go.”

Part 5: Opportunities

The energy revolution necessary to slow global warming could benefit German industry and investors. Find out who will win and how.

Germany boasts one of the world’s biggest and most advanced renewable energy sectors. In 2007, the renewable energy industry employed some 217,000 people. The German Association for Renewable Energy estimates that some 60.000 new jobs will be created by 2010, although the economic crisis could thwart this prognosis.

Germany is well placed to maintain a leading role as an exporter of environmental technology as other countries – such as China and India – consume more renewable energy. The industry's turnover exceeded 11 billion euros in 2007, with future growth projected. The German Institute for Economic Research (DIW) says environmental technology could replace the automobile sector as the country’s most important export industry.

Wind Power

Wind energy is the centerpiece of Germany’s renewable energy sector. The German Wind Energy Association (BWE) says that the megawatt capacity of wind energy jumped in Germany by more than 23 percent in 2006, while the global market grew by 30 percent. Revenues from wind exports reached 3 billion euros in 2005, the BWE reports.

Solar Power

Germany is also a global leader – along with Japan and the United States – in the manufacturing and installation of solar thermal and photovoltaic technology. Declining production costs and government policies such as the Renewable Energy Act and the "100,000 Roofs Program" has led to the rapid expansion of photovoltaic capacity in Germany.

In 2005 and 2006, Germans installed over 800 Megawatts (MW) of photovoltaic capacity, the largest growth of any country. In 2007, this impressive figure grew to 1.1 gigawatts, nearly half of the 2.3 gigawatts installed worldwide that year.

Carbon dioxide emissions trading

Beyond the promise of renewable energies, German investors can benefit from the opportunities of the global carbon market created by the Kyoto Protocol and the EU Emissions Trading Scheme (ETS), which represented about 18.1 billion euros in transactions in 2006.

Energy consumption

German communities have explored sustainable forms of development. Vauban is a small town of 4,700 residents developed on a former military base in southwestern Germany which experimented with various “green” principles, most notably a lack of cars. Only 150 out of every 1,000 residents own a car, while a parking space in Vauban reportedly costs over 17,000 euros.

But it is not only small towns that are looking at ways to cut energy demand. The German capital of Berlin, a city of around 3.5 million people, has been recognized as a leading “green” city due in part to its reduction of carbon dioxide emissions since 1990 and its ongoing promotion of energy efficiency and renewable energy use.

The Reichstag, the German parliament, is the city’s most famous environmentally friendly building, complete with rooftop solar panels and innovative systems that efficiently regulate the internal air and water temperatures.

Part 6: G8 Signal Has to Be “Loud, Long and Legal”

In June 2007, Germany is hosting the G8 Summit in Heiligendamm. Germanwatch Director Christoph Bals talks about his expectations and what has to be done in Germany to stop global warming.

What has to be done in Germany to stop climate change? What steps would be most effective?

I see three main criteria for climate policy decisions in Germany: What is the long term relevance for the emission trend in Germany? What is the relevance of policy decisions to support international climate dynamics? Is the policy signal “loud, long and legal” so that the financial market can base investment decisions on it?

The further development of the carbon market with stringent caps and full auctioning is crucial. The EU-Emission Trading System has the potential to become the cornerstone of an emerging international system, if it is well designed. The feed-in law for renewable energy has shown that it can pave the way for renewable electricity. Similarly, effective incentive systems for co-generation and solar heat should be introduced during this legislature period.

Who are the most important players in Germany in the fight against climate change, and why? Whose support is crucial?

Four players are crucial: the politicians, the finance sector, energy intensive business sectors, and civil society. The political sector has to set the right framework that channels the thousands of billions of euros in a climate-friendly direction, which are going to be invested in the coming decades worldwide into energy and transportation systems.

The finance sector has to make the right investment decisions, especially for long-term investments (utilities, airplanes ...). The energy intensive business sectors have to invent business models which allow them to move into a less greenhouse-intensive future. And the civil society has to generate constructive pressure on politicians to move forward, and at the same time, it has to buy more climate-friendly products and services.

What positive steps can the world expect from Germany in future international efforts to stop climate change?

The German government has played a very constructive role during the EU- and G8 presidency, to move international climate policy forward. The EU decisions from March 2007 are a breakthrough at the EU level. I’m not very optimistic that the G8 summit in Heiligendamm will bring a similar international step forward. But it is good to see that the German presidency is fighting for it.

It is less clear whether the German government has the courage to bring forward the national transformation of energy, transportation and building sectors as needed. If Germany moved forward here, its credibility for international negotiations would be much stronger.

Part 7: “There Are Preconditions for Growth”

Gerhard Rupprecht, Chairman of the Board of Allianz Deutschland AG, about what must be done in Germany to fight climate change and create growth and jobs.

What are your estimates of the potential economic impacts, positive as well as negative, that climate change can have in Germany?

Climate change is a global phenomenon with local effects. There will be massive changes in our environment and severe impacts on nature, society and economy – also in Germany. It affects the wealth of societies, the availability of natural resources, the price of energy and the value of companies. The insurance industry is on the frontline of climate impacts and has an early warning function for the whole economy.

On the other hand, climate protection is an opportunity for economic growth – especially in Germany. The key solution to climate change is the development of low-carbon technologies. We need both alternative energies and more efficient energy conversion to reduce greenhouse gases.

Germany is in a very good position to be in front of that. The goal is a 20-percent reduction of greenhouse gases emissions by 2012 (from 2000). Our environmental technology industry will be able to create 700,000 new jobs between now and 2030. The volume of the market for environmental technology will increase from 60 billion euros in 2006 to 400 billion euros in 2030.

But there are preconditions for growth. We are pinning much hope on the G8 summit and hope for a strong signal in favor of climate change negotiations. The climate change and energy strategy endorsed by the European Union and the German governments eight-point plan for reducing carbon dioxide emissions should be implemented as soon as possible.

How do Allianz employees and customers in Germany react to climate change and the recent debates about it?

The attention for climate change issues is very high in Germany. Recent polling suggests that nearly 70 percent of the people regard climate change as a danger for their own future, especially caused by natural catastrophes.

First of all, Allianz has to care for its customers in two ways: we want to use our traditional insurance expertise as a risk manager to help our customers understand climate risks that impact them, and we want to develop financial products and services that help reduce those risks.

How will climate change affect your business? What are the risks and opportunities?

Insurance companies like Allianz must be interested in reducing global warming. More natural catastrophes will raise the costs of claims. Every storm like Kyrill or a flood like 2002 in Eastern Germany causes massive damages we have to pay for. There is a need to prepare for the negative effects that climate change may have on our business and on our customers. Climate change risk is getting more and more integrated into our business procedures.

The result will be a mitigation of economic risks and solutions for our clients. But there are also business opportunities associated with climate change like emissions trading, investment in renewable energies and new insurance products to help customers manage environmental risks. One example: in June Allianz Germany will start a new real estate coverage for commercial clients considering sustainability.

Part 8: "Become a Role Model"

Otto Steinmetz, Head of the Allianz Climate Core Group and Dresdner Bank's Chief Risk Officer, gives a banker's perspective on climate change and its impacts in Germany.

What are your estimates of the potential economic impacts, positive as well as negative, that climate change can have in Germany?

According to a brand new report of the German Institute for Economic Research (DIW), climate change will cause enormous extra costs for Germany in the future. In case the global mean temperature rises up to 4.5 degrees Celsius by 2100 - as predicted by the latest IPCC report in case no measures are taken - the German economy might face an additional burden of up to 800 billion Euros by 2050.

However, climate change, as threatening as it is and as urgent as there is political action needed, also will offer some economic opportunities for Germany. As more and more jobs are being transferred out of Germany we feel the need for innovation and new technology. In the second half of the 20th century, the car industry was the growth and job engine of Germany. In the coming decades, Germany's clean technology can play this role. Now Germany has a huge opportunity to become a role model and the world leader in this technology.

A recent study of our economists shows that as much as 700,000 new jobs will be created in the clean technology sector in Germany until 2030. The volume of investments will more than six fold in the same time. Of course: climate change will have a big impact on our economy, but we should concentrate on the upside.

How do Allianz employees and customers in Germany react to climate change and the recent debates about it?

Customers and employees increasingly wonder what impact climate change will have on their businesses and on their products. Customers in the area of corporate banking for instance ask us how emission trading one day will be relevant for their company - and we help them on that matter. Other customers want to know whether we offer financing for alternative energy projects – which we do.

Employees often are surprised if they read about Dresdner Bank in the context of climate change in the media. People often do not realize how deep the bank is already involved in the political discussion and that climate change also offers the opportunity to develop business cases.

How will climate change affect your business?

Climate change will definitely have a big impact on all areas of our business. Within the Allianz Group we see how hurricanes in the U.S. are a challenge for our insurance business. We see in our Asset Management how people want to invest in alternative energy projects.

At Dresdner Bank we experience that corporate customers actively manage their CO2 emissions – and we are helping them with our expertise how to position themselves in trading the respective certificates. As a bank we have our own CO2 reduction target: 28 percent by the year 2012. This shows that all areas are affected by climate change.

What are the risks and opportunities?

For us climate change also involves a number of business opportunities – for instance the CO2-emission trading system. Right now we are leader in the European core market, which has a current annual volume of 20 billion Euros and which has an enormous potential worldwide. Once the CO2-trading system is implemented in other regions an sections of the economy our expertise will come in handy.

On the risks side we hope that the threat of manmade global warming is understood worldwide and that governments succeed in finding ways to solve the problem. I hope the G8 summit will give a strong signal that we need a global solution and a long term commitment.

Editors: Thilo Kunzemann & Valdis Wish
Source: Allianz Knowledge