A coalition government would likely focus on energy, transportation, and the automotive industry to meet Paris Agreement targets.

Background

After the 2017 German parliamentary elections, the conservative Christian Democrats (CDU/CSU) and the Social Democrats (SPD) faced difficulties in forming a new government. However, the parties have now agreed on preliminary key terms for the government’s 2018-2021 policy in a 28-page memorandum. The key terms will serve as the basis of formal coalition negotiations, which the parties likely will conclude in February or March 2018. Whether the parties will form a new government at the end of these negotiations still remains to be decided, however, based on the current election results, a so-called “grand coalition” between the two largest parliamentary groups is the most probable outcome. Therefore, the key terms will likely form the cornerstones of the next government’s political agenda.

The memorandum provides insight into German environmental policy, which will have significant impact, particularly on the energy and automotive industries. This blog highlights two key terms of the memorandum, and considers the potential outcome for German energy and automotive industries.

Climate Change and Energy Transition

Germany will likely fail to meet its 2020 greenhouse gas reduction goals by a significant margin. While accepting this, the future coalition partners will try to reduce the shortfall as far as possible. Furthermore, the parties will pass a Paris Agreement Implementation Act and aim to implement measures sufficient to meet the 2030 reduction goals — particularly in the energy sector.

Another noteworthy measure is the successive reduction and eventual termination of coal-fired power generation. The parties plan to agree to measures and a final phase-out date by the end of 2018. While the parties are yet to finalize the details and accompanying legal, economic, social, and structural measures, coal-fired power generation will likely draw to an end in the coming decades (as will German nuclear power generation by 2022).

At the same time, the memorandum calls for increasing the share of renewables to 65% by 2030. The government will offer a special invitation to tender (four gigawatts each of onshore wind power and photovoltaics as well as an additional contribution by offshore wind power) to contribute 8-10 million tons of CO2 reduction towards the 2020 goals, and further expedite the expansion and modernization of the energy grids.

Transportation/Mobility and Clean Air

The parties recognise the Paris Agreement goals for the automotive sector and the need for improved air pollution control. At the same time, the parties emphasize their commitment to social aspects, industry competitiveness, and affordable mobility. Driving bans should be “avoided,” and the parties will support more efficient and cleaner combustion engines (including retrofitting). While the memorandum does not explicitly address diesel engines, apparently the parties do not plan to agree to a phase-out of diesel engines in passenger cars.

Outlook

In conclusion, the parties still need to discuss and negotiate many details, but these high-level key terms suggest a new “grand coalition” would likely significantly change the framework of the German energy industry, with substantial investment opportunities arising from the further expansion of renewables. At the same time, policy or regulatory pressure from the government on the automotive industry will probably remain limited, and the diesel engine will likely remain on the market in the medium term.

This post was prepared with the Assistance of Tegan Creedy in the London office of Latham & Watkins.