Climate versus economy: Does Germany need to choose?
February 11, 2025
Jobs, incomes and Germany's flagging economy are major focuses for the country's political parties ahead of elections this month, with many taking aim at climate-protection measures.
Friedrich Merz — chairman of the center-right Christian Democratic Union (CDU) and widely tipped to be the country's next chancellor — has said he would wind down coal and gas power plants only if it didn't damage German industry.
Even parties active on climate issues are less vocal on the topic than during 2021's election.
This has left some experts concerned that the economy is taking precedence over the climate, although research from the Climate Alliance, a German coalition of civil society groups, found most of the population would like to see more climate action.
"It is already evident that, in the run-up to the federal elections, the climate and the economy are once again being played off against each other," said Claudia Kemfert, an economist and energy expert at the German Institute for Economic Research (DIW).
Is climate action to blame for Germany's economic woes?
For the first time in decades, Germany's economy, the biggest in Europe, has shrunk for two consecutive years.
Its industrial export-orientated economy has been hit by high energy prices, as well as sluggish domestic demand and weak global trade. At the same time, its car industry — the iconic backbone of its economy — has announced mass layoffs and shrinking sales and profits.
Climate-change mitigation policy isn't driving this economic slump, said Gunnar Luderer, a scientist focusing on energy transition at the Potsdam Institute for Climate Impact Research. "The German economy's problems are of a structural nature, and they are deeper."
He said a key problem has been Germany's reliance on gas from Russia, which was expensive to transition away from after Moscow's invasion of Ukraine, and that high energy prices have impacted the economy both by pushing up production costs for energy-intensive industries such as steel and chemicals, and by raising bills for individuals.
Germany's economic model has also proven vulnerable to international competition and pressure from China's expansion into new markets, such as e-mobility, according to Luderer. "German car manufacturers were quite slow and actually too late to move on this new trend," he said, adding that the country is now paying for it.
While Europe and the US have seen waning sales of electric vehicles, in China they are booming, accounting for almost 50% of all cars sold.
Jobs and overlooked opportunities
"The general claim that climate-protection measures in Germany have a negative impact on the economy is not true," said Kemfert, who argues that clever climate-protection measures create enormous economic advantages that are often underestimated.
Expanding renewables, electromobility, energy-efficient renovation and energy efficiency in the industrial sector are all measures that demand investments, which creates "value and jobs," said Kemfert.
She highlighted that the renewable energy sector has so far created almost 400,000 jobs in Germany. Employment in the sector rose almost 15% between 2021 and 2022, with the solar and heat pump sectors expanding the fastest.
"If Germany plays the economy off against the climate, there is a risk of job losses, a loss of competitiveness and high fossil-fuel costs," Kemfert said.
Given the German economy's strength in manufacturing, machinery and the automotive sector, there are lots of economic opportunities in becoming a lead player in green technologies — such as wind power, heat pumps, e-mobility, or smart control technology to increase flexibility in energy demands, said Luderer.
The Federation of German Industry (BDI), an association that counts chemical, engineering and electrical companies amongst its members, has itself voiced support for climate policies, arguing green technologies will be pivotal to Germany's future industrial success.
Experts also say the presence of renewables in the energy mix has meant the price of electricity has not risen as sharply as would have been expected, given recent skyrocketing gas prices.
Niklas Höhne, a scientist and founder of the German research nonprofit NewClimate Institute, explains that electricity prices are pushed up by the most expensive power source in the energy mix, which are usually gas plants, while renewables continue to drop in cost around the world.
"So it's really our dependency on fossil fuels that drives electricity prices up rather than the expansion of renewables," he said.
The costs of uncertainty and inaction
Several political parties have stated they would reverse Germany's controversial building energy act to phase out fossil-fuel heating systems, which came into force at the beginning of last year, as well as challenge the ban on new combustion engine cars in the EU by 2035.
This political uncertainty is hindering planning security for businesses, said Stefanie Langkamp, executive director of politics at Climate Alliance. "Whenever you talk to industry, whenever you talk to trade unions, they say that this is one of the most important things for them to set their ways for the future."
She highlights the heat pump industry, which has already hired and trained new skilled craftspeople, as well as procured resources to ramp up its capacity.
"If you do not invest in climate action today, then you face really huge consequences, both regarding the economy and also the cost of climate change," said Langkamp.
The economic damage caused globally by climate change is estimated to be six times higher than the money needed to invest in measures to cut emissions and keep global heating below 2C (3.6F) above pre-industrial levels, according to a study published in the scientific journal Nature. In Germany, extreme weather such as storms and floods is estimated to have caused €7 billion ($7.2 billion) worth of damage in 2024 alone.
The world is shifting towards a climate-neutral economy in the next decades, and many advances in renewables, heat pumps, electric vehicles have already been made, said Langkamp.
"There might be different paces within some countries or some industries, but still this is a worldwide movement and it will not stop. So this is why if you do not invest into climate action now, then you will have competitiveness problems later."
"The only option for the German economy is really to proactively embrace the challenges and opportunities of the green transition," said Luderer. "There is no way back. And the greatest risk to the German economy is to slow down the transition or to rely too heavily on old business models that are no longer viable."
Edited by: Jennifer Collins and Tamsin Walker