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Agora: How Investments in Climate Neutrality Strengthen Economy and Society - E-Mobility as a Key

Germany must be climate neutral by 2045. A new Agora study shows with what mix of measures the path can be socially balanced and the necessary investments mobilized. Central to this is the electrification of transport: e-cars are already cheaper than combustion engines today. Additionally, the think tank recommends: maintain CO2 regulations, provide purchase incentives for small BEVs, align vehicle and company car taxation with CO2 emissions, and promote sharing and public transport.

The electrification of mobility plays a central role in the climate transition. | Photo: VW
The electrification of mobility plays a central role in the climate transition. | Photo: VW
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Three-quarters of the investments necessary for a climate-neutral Germany can be mobilized by redirecting funds away from fossil technologies towards climate-neutral alternatives, according to a new study by the Agora think tanks. The total demand for investments amounts to 11 percent of the gross domestic product (GDP) annually until 2045, the majority of which would be needed even without climate protection: Massive investments equivalent to about 8 percent of GDP are required annually solely for the maintenance and renewal of buildings, industrial plants, and vehicles, which need to be redirected towards climate neutrality. The additional investments required for climate protection amount to around 3 percent of GDP from 2025 to 2045, or approximately 147 billion euros annually. Most of these are private investments; a quarter – about 38 billion – come from the public sector.

E-cars are already cheaper than combustion engines

Many of the required investments already pay off today when considering their entire lifespan. Electric cars, for instance, are often cheaper than petrol and diesel vehicles due to lower operating costs, despite higher purchase prices. In the Agora scenario, around 90 percent of the necessary investments in renewable energy and power grids can also be financed through market revenues and grid charges. At the same time, the costs of the power system per kilowatt-hour (kWh) remain stable until 2030 and even decrease by a fifth by 2045. The Agora study "Climate-Neutral Germany - From Goal Setting to Implementation" provides, for the first time, a detailed calculation of the respective investment needs through cross-sector scenario modeling. Additionally, the study contains a balanced package of measures to efficiently enable these expenditures while ensuring social inclusion.

"Our vision of the future is not a given. For it to become reality, decisive political measures are needed," says Simon Müller, Director of Agora Energiewende Germany. "The path to climate neutrality requires a societal effort, from which all parts of society will benefit."

The development described in the scenario is associated with a number of additional benefits. For example, Germany's dependence on energy imports decreases by 85 percent over the next 20 years. Companies investing in key technologies such as electromobility, renewable energies, and climate-neutral industrial production secure a long-term competitive advantage in the global growth markets. The transition in transport and heating also offers opportunities to improve the quality of life for the population.

Cushioning cost burdens

To avoid excessive cost burdens for businesses or households during the transition phase towards climate neutrality and to specifically support them in their investments, the study indicates a public financial need of 58 billion euros annually until 2030. These government funds primarily flow into investment and operating subsidies, for instance in the building sector or as part of climate protection contracts. To a significantly lesser extent, these also finance compensation payments for households and companies that are in international competition. Examples include the continuation of electricity price compensation and the introduction of targeted social compensation payments.

Clean mobility as a key technology

Strengthening future technologies also plays a central role in the automotive industry sector in the Agora scenario. This requires a strong national market for electric vehicles and reliable framework conditions.

"Planning security and investment incentives to switch to electric drives are crucial for the competitiveness of the German automotive industry," says Dr. Wiebke Zimmer, Deputy Director of Agora Verkehrswende.

"Consumers also benefit from this. Electric cars are often cheaper than combustion engines when considering lifecycle costs – and the prices for petrol and diesel will continue to rise in the coming years due to European CO2 pricing. As a key for the transition in road transport, the scenario calls for a comprehensive and socially balanced reform of taxes and charges, particularly aligning vehicle taxation and company car taxation with CO2 emissions.

"The CO2 fleet limits must be maintained, and instead of higher import tariffs on e-cars from China, the EU and particularly the German industry should focus on cooperation with Chinese companies," says Zimmer.

Purchase incentives make the most sense for smaller electric vehicles and used cars, as this benefits those who cannot afford an expensive new car yet are reliant on one. Finally, a long-term secured and comprehensive investment drive for public transport and sharing offers is needed to guarantee minimum mobility standards without a private car, even in rural areas. By 2040 at the latest, this can double the performance in rail passenger transport and increase it by 80 percent in public transport, the study shows. Along with the electrification of vehicles, shifting transport to buses and trains opens up new possibilities for designing public spaces – with less noise and pollution and more safety and attractiveness.

"A coherent transport transition ensures economic prospects, strengthens social inclusion, and increases the quality of life for everyone," says Zimmer.

 

A policy mix for a balanced climate policy

To mobilize the necessary investments, the Agora study recommends a mix of four mutually complementary policy instruments. Price-based incentives like CO pricing increase the cost of fossil fuels and thus make climate-friendly technologies more attractive. Market regulation allows the restriction of harmful technologies and thus supports climate-friendly technologies. However, these instruments do not yet ensure affordability: To enable households and companies without sufficient financial resources to transition to climate-neutral alternatives such as electric vehicles, financial support is needed in the form of subsidies or low-interest financing.

A too strong focus on subsidies, however, carries the risk of burdening state budgets and cost inefficiency. The fourth key component of the study involves the expansion and renewal of sustainable infrastructure for energy and transport, as this forms a basic requirement for a transition to climate-neutral alternatives. “A balanced policy mix is key to the transformation to climate neutrality,” says Müller. “Market regulation provides investment security, price-based incentives mobilize market forces for climate protection, and financial support ensures social fairness so that individuals are not overwhelmed. Infrastructure delivers the foundation for practical implementation and strengthens societal support for the path to climate neutrality.”

A significantly more capable electricity system with decreasing costs per kilowatt-hour

That renewable electricity based on these measures is economically affordable despite the costs for grid expansion and controllable power plants becomes clear when looking at the study results on the energy sector: Stimulated by the European emissions trading and low expansion costs, renewable energies are consistently expanded as the cheapest form of generation: By 2045, generation from renewable energies increases fivefold from 219 TWh in 2023 to 1,087 TWh in 2045. Incentives for electrification, such as a discounted electricity price for heat pumps and support for industry conversion, ensure that supply and demand develop in unison. The average costs of this electricity system remain relatively stable for all consumer groups at 16 cents per kilowatt-hour until 2030 and fall to 13 cents per kilowatt-hour by 2045. At the same time, due to the expansion of renewable energies, dependency on energy imports decreases by almost 85 percent: from 2,474 terawatt-hours in 2019 to 391 terawatt-hours in 2045.

“Electricity will not become more expensive in our scenario, even if consumption rises sharply,” says Müller. “This is good news for companies and consumers. At the same time, the growing share of domestically generated renewable electricity strengthens Germany's energy security.”

 

Climate protection investments made today secure the competitiveness of tomorrow

The investments and measures outlined in the study also lay the groundwork for overcoming the current weaknesses of the industry, strengthening its competitiveness, and once again assuming a leading position internationally in the field of future technologies. These measures include the direct electrification of process heat in the industry, which, in the scenario up to 2035, can replace the majority of the fossil energy currently used for this purpose and massively increase efficiency. By 2040, industrial natural gas consumption will drop to near zero, while electricity consumption will double from 2025 to more than 400 terawatt-hours. For the emissions-intensive sectors of steel and concrete, the study suggests making the transition to climate-neutral production methods more economically attractive by creating green lead markets. The construction industry can become a driver of industrial transformation if, for example, emission limits are set for new buildings in the context of government procurement of such basic materials. In addition, new value chains are created, for example by replacing previously imported fossil raw materials in the chemical industry with sustainably cultivated biomass domestically.

“We are currently witnessing a crisis of conventional business models. If the right course is set now to trigger the necessary climate-neutral investments in the industry, the German economy will be competitively positioned in many important future markets,” says Frank Peter, Director of Agora Industry.

Enabling climate-neutral living

Climate and social policy challenges also arise in the building sector, which is also lagging in meeting climate targets. With the EU emissions trading scheme, rising prices for fossil-fuelled heating systems are foreseeable from 2027 onwards. Here, targeted subsidies are necessary to enable all households to switch to climate-friendly alternatives. On the other hand, the study proposes clear regulatory requirements for the energy efficiency of buildings because renovations not only make the houses more heat-resilient; they also reduce energy consumption and thus the costs for their residents. However, targeted government financial support is necessary here because, even if they lead to an increase in value, not all households have the means to make the investments.

“Effective climate policy enables a livable future for all. It is high time to tackle this societal task across party lines. With our study, we aim to contribute to this,” says Müller.

Translated automatically from German.
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