De-industrialisation in Germany dramatically reduces emissions in 2023

De-industrialisation in Germany dramatically reduces emissions in 2023
Germany led Europe in reducing emissions in 2023, but the fall had more to do with the painful de-industrialisation the country is going through as a result of the end of cheap Russian gas rather than green policies. / bne IntelliNews
By bne IntelliNews January 5, 2024

Germany led the way in reducing emissions in 2023, but the fall had more to do with the dramatic de-industrialisation due to the effects of the war in Ukraine and soaring energy costs than it did with green policies.

Greenhouse gas emissions in Germany fell by approximately 20% in 2023, reaching their lowest level since the 1950s, according to a report by Berlin-based think-tank Agora Energiewende, as reported by the Financial Times on January 4.

The country emitted 673mn tonnes of carbon dioxide equivalent in 2023, with about half of the reduction attributed to a decline in coal-fired power generation.

However, emissions from the construction and transport industries remained largely unchanged in 2023, following several years of failure to reach reduction targets. The chemical industry, Germany's third largest industrial sector, has also lost 23% of its production volume within two years, Handelsblatt reports. As a result, Germany is expected to miss EU-wide emission reduction goals as set out under the so-called Effort Sharing Regulation, Agora said.

Leading industrial managers in the German chemistry are sceptical as to whether the industry will be able to return to the production volume of 2021 in the next few years. “We are in the middle of a deep, long valley,” Markus Steilemann, president of the Chemical Industry Association (VCI) and CEO of Covestro, told Handelsblatt, one of Germany’s leading business newspapers.

0124 EURO German chemical production index HANDELSBLATT

This failure highlights that the headline reduction in emissions has more to do with Germany’s economic slowdown than successful implementation of green policies. Lethargic German industrial activity, influenced by the war in Ukraine and energy price crises, played a crucial role, accounting for half of the emissions drop, the report found, whereas the growth in renewable energy contributed 15% to the fall in emissions.

However, the leading German industrial companies report that the fall in customer orders since spring 2023 is now slowing and the market appears to be finding a new, albeit lower, equilibrium, according to leading suppliers such as BASF and the world's largest chemical retailer Brenntag. But that's not enough to create any optimism, because there is a lack of real growth. German companies' hopes are based on a slow recovery starting in the second half of 2024.

As reported by bne IntelliNews, the sanctions on Russia and the halt in delivery of Russian piped gas after the Nord Stream 1 & 2 gas pipelines were destroyed last September have had a heavy impact on Germany’s heavy industry.

Accounting for about a quarter of German GDP – twice the level of other large European powers – some 10% of heavy industry has been forced to close down or dramatically reduce production.

German chemical companies are now very cautious when it comes to investing at home: around 40% of them will reduce their investments in Germany in 2023 and 2024, according to recent industry survey. However, the majority of companies are planning to increase foreign investments or leave completely.

Up to a third of Germany’s heavy industry is either planning to move, or has already started the process of moving, abroad to lower-cost markets. The biggest hope for the chemical industry is China, where almost half of global chemical demand already comes from.

The German industrial lobby has said that German heavy industry should start recovering in 2025, but that assumes energy prices will fall to previous levels. A recent IMF white paper concluded that the higher prices, caused by the remake of Europe’s energy markets and the end of cheap Russian gas imports, means the higher energy prices are likely to be a permanent change that will fundamentally affect Germany’s business model.

Germany’s economy has already stalled as a result of the seismic changes to its economic make-up. Agora said that while preliminary figures showed German economic output dropped 0.3% in 2023, the equivalent figure for energy-intensive production in industries such as chemicals and steel was 11%, the FT reports.

German Vice-Chancellor Robert Habeck acknowledged the decline in fossil fuel use but highlighted the importance of distinguishing between the impact of the war and energy price crises on industrial production. He emphasised the need to maintain Germany as a strong industrial location while transitioning to climate neutrality.

Siegfried Russwurm, president of Germany’s industrial lobby, criticised the government for not grasping the critical situation facing manufacturing businesses, the FT reported. Rising energy costs and a lack of government support were identified as challenges for industries aiming to be both green and globally competitive.

Agora Energiewende stressed the importance of preventing emissions from being relocated abroad and called for a stable framework to encourage investment in climate-friendly technologies. The think-tank highlighted the need for an "investment offensive" to achieve long-term goals, including the rollout of hydrogen pipelines and improvements to electricity grids.

While the 21% drop in emissions is a positive development, after Germany shuttered its six nuclear power stations last year it has been forced to start importing electricity. However, that also contributed to the drop in its emissions, as almost half of electricity imports came from renewable sources, mainly hydro and wind, and another quarter from nuclear. Coupled with a 5% increase in domestic renewable energy supplies thanks to record solar and wind production investments, this took the share of total renewable energy in Germany to more than 50% for the first time.