Climate Paths 2.0 study – Recommendations for action

POSITION | CLIMATE POLICY | ENERGY, INDUSTRY, TRANSPORT, BUILDINGS

Climate Paths 2.0 study – Recommendations for action How to make our industrial country climate neutral

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Contents

Contents Making our industrial country climate neutral........................................................................................................................ 5 Climate Paths 2.0 – Why an update?.......................................................................................................................................... 6 01. Achieving the 2030 climate target....................................................................................................................................... 8 €860 billion and united political will in cooperation with the business community....................................................8 02. Climate neutrality 2045.........................................................................................................................................................10 Launching a national infrastructure programme.............................................................................................................12 Carbon pricing: a key instrument, but not sufficient on its own..................................................................................16 Incentives the switch to electricity ...................................................................................................................................18 Design a national biomass strategy..................................................................................................................................19 03. What needs to be done now in the individual sectors................................................................................................20 Industry................................................................................................................................................................21 Putting the energy system on the path to carbon neutrality................................................................................24 Transformation path mobility until 2030..............................................................................................................28 Transformation path buildings.............................................................................................................................33 Imprint................................................................................................................................................................................................38

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“The transformation to a carbon-neutral industrialised country requires an unprecedented transformation in all parts of the economy, public sector and society“

Siegfried Russwurm BDI President

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Making our industrial country climate neutral

Making our industrial country climate neutral The ambitious European and German climate targets to reach greenhouse gas neutrality by 2050 and 2045 respectively represent an enormous challenge for society, administration, business and science. Becoming a climate-neutral industrial country requires a transformation in all areas of the economy and society. To meet this complex challenge, the BDI proposes a broad mix of instruments in climate, energy, transport and industrial policy. An increasing carbon price as a sole instrument will be insufficient. Germany must almost halve its emissions by 2030, i.e. within nine years. The BDI study „Climate Paths 2.0“ examines which instruments can pave the way for this transformation. It shows that industry with its technologies is the key enabler for successful climate protection. The prerequisite for this is the international competitiveness of German businesses. The following points are crucial in the view of the BDI:

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For the 2030 climate targets, the required climate-friendly technologies are mostly known, but not yet economically viable for companies and consumers and/or not yet available on an industrial scale. For the 2045 greenhouse gas neutrality target there is still a considerable need for research and innovation.

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Overall, there is a need for additional investment of €860 billion by 2030 – i.e. over the next nine years.

A prerequisite for investments of companies and businesses is the access to climate friendly energies, such as green electricity or hydrogen at their production site as. As long as this access is lacking, rising carbon prices are just a financial burden without any climate protection effect.

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To this end Germany requires a massive infrastructure expansion for electricity, hydrogen, district heating and CO₂ networks and grids, charging and hydrogen tank infrastructure as well as transport links, especially rail networks. The costs for this expansion are set at €145 billion beyond existing plans or €240 billion including existing plans.

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For investment decisions in the industry, the greatest challenge are not the capital costs of climate-friendly technologies, but above all the significantly higher operating costs. Therefore, it is crucial to make low-carbon production processes and energy carriers competitive compared with fossil fuels and existing processes.

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In order to support the necessary electrification, the BDI is calling to substantially cut down state-induced components of electricity costs by abolishing the EEG-levy, co-financing the grid charges and extending the so-called Spitzenausgleich (peak compensation). In addition, businesses need reliable operating subsidies for the market ramp-up of hydrogen and renewable fuels of non-biological origin (RFNBO).

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The ambitious climate targets leave no time for years of planning and approval procedures.

Germany needs a revolution in planning and approval procedures, as well as a significant shortening of court proceedings on infrastructure projects.

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If implemented in a competition-neutral manner, the mix of instruments presented in the study should ensure the international competitiveness of companies and businesses. Electricity price compensations and more free allocations in the EU ETS can address the looming carbon leakage risk. On a European level, one has to work towards a more open setup of EU state aid law in order to enable government support for companies’ climate transformation.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate Paths 2.0 – Why an update?

Climate Paths 2.0 – Why an update?

In January 2018, the BDI published its study “Climate Paths for Germany”, which described economically optimised carbon reduction paths up to 2050 for all sectors and technologies in various scenarios with estimated necessary cumulative additional investments. Today, the study is a widely cited reference and has shaped the role of industry as a constructive co-designer of a sustainable transformation path. It proved to be the starting point for an in-depth climate policy exchange with many stakeholders. At the same time, by bringing together the many sectors, it has enabled industry to take a common view of technically and economically feasible paths.

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With this determination, the discussion has to move from the target level to the definition of the necessary political instruments. For individual companies the necessary high investments in climate protection technologies are still uneconomical and uncompetitive. This is the reason, why companies and businesses are hesitant to make these investments at present, even though they are indispensable for achieving the political climate targets.

This study aims to outline what necessary Germany needs to take in the years leading up to 2030. The study shows the required investments and to what extent support measures, pricing and accompaMany of the results (of the -95 % nying instruments can contribute. pathway) are still very valid almost It has to be the aim of every The challenge and the pressure to four years later. However, there have government to make climate act are immense. In all four sectors been significant changes in some policy efforts internationally examined – energy, industry, buildareas, such as the use of hydrogen ings and transport – they are pushcomparable and to agree on and CCUS technologies. Above all, ing the limits of what many of the international instruments for involved experts regard as conceivathe climate policy targets changed fundamentally in 2021. First at the this purpose. ble in the remaining nine years. ComEU level and then at the national panies urgently need a secure legal level: -65 per cent reduction of greenhouse gases by framework in order to play the considerable required 2030 for Germany, climate neutrality by 2045. investments. Climate lawsuits tend to have a counterproductive effect in this context.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate Paths 2.0 – Why an update?

The study was commissioned to determine pathways showing how Germany can achieve the national sector carbon emission reduction targets for 2030. The authors of the study describe the most economically cost-effective paths based on current knowledge and taken assumptions. Assessing the actual real-world likelihood of achieve the climate targets and their realisation was not the subject of the study. The paths are steady, consistent within themselves paths towards climate neutrality, even beyond 2030. They set aside symbolic switchoff dates or striking technology bans and intend to make expensive, inefficient short-term measures unnecessary.

One can note that all necessary technologies to achieve the 2030 target are already known in principle, although some have not yet reached large-scale market maturity.

This does not, however, not apply to all technologies needed to achieve net greenhouse gas neutrality by 2045.

Modelling pathways to achieve national sectoral targets in 2030 should not obscure the fact that it has to be the aim of every government to make climate policy efforts internationally comparable and to agree on international instruments for this purpose. European approaches, such as the common carbon pricing should therefore be supported within the framework of the Green Deal and broadened internationally. As long as climate policy ambition levels and cost burdens outside Europe differ significantly from those in the EU, maintaining the competitiveness of industry and supporting its transformation must play a key role. In light of these different ambition levels, maintaining the competitiveness of industry prevents carbon leakage and represents climate protection. Only competitive companies can accomplish ambitious climate protection.

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01

Achieving the 2030 climate target

€860 billion and united political will in cooperation with the business community

well as the German economy and do not lead to investment ruins. Ensuring the sustainability of the public budget is an important aspect in this context.

Germany needs to almost halve its emissions by 2030.

The biggest challenge is to plan and spend the enormous investments of €860 billion – i.e. around €100 billion per year from 2022 – in a way that investments are target-oriented, have a positive impact on the climate as

Germany needs to work on integrating national ambitions into international and European contexts in a targeted and consistent manner. National efforts should be linked with international and European frameworks.

€860B additional investments in climate protection by 2030 Cumulative additional investments 2021–2030 B€ cumulated, in real terms 2019

INDUSTRY

TRANSPORT

BUILDINGS

ENERGY

415 Electricity, H² , CO² grids NEP accelerated from 2035 to 2030, development of new H² and CO² infrastructure

155

175 220 New facilities in steel, chemicals and cement

45

Efficient processes

39 30

Renewable heat Material defossil.

50

21 10 18 3

74 25 5

63

Onshore wind to 98 GW

40

Offshore wind to 28 GW

67

Photovoltaic to 140 GW

860 415

860 560

(H²-ready) gas power plants auf 74 GW

48 18

TOTAL

22

Green district heating Other (storage, H²)

80

Building renovation from 1.1% to 1.9% energy-efficient renovation rate

67

Renewable heat (heat pumps, district heat, H²) to, e.g., 6M heat pumps

27

Efficient equipment and processes

PtL plants (abroad) and H² plants (domestic) for approx. 3 Mt PtL and approx. 10 TWh H² for national transport in 2030

Energy

175 Target Buildings

220

300

Electric cars 14M BEV in the fleet (over 90% of new registrations in 2030) E- and hydrogen trucks > 220K in the fleet (> 75% new registrations in 2030) Charging and H² infrastructure 9M private charging points, 240K fast charging points, 5M charging points at the workplace, > 1M publicly accessible charging points, and 500 H² filling stations Expansion of rail + 30% passenger transport, +40% freight transport

Transport

Other

Industry

50

Current policies

Note: In the case of renewable heat and alternative powertrains in transport, the additional investments describe the acquisition costs compared to conventional technologies; cumulative additional investments do not include investments in projects under construction that will be initiated before 2030 but will not go into operation until after 2030 Source: BCG analysis 8

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Achieving the 2030 climate target

With current policies Germany will fail to reach the climate targets in any sector. The current climate policy is therefore insufficient. Without immediate changes, Germany is set save about 184 Mt of CO₂ by 2030 – only half as much as necessary. Achieving the 2030 targets is possible with technologies that either are already available or are at least foreseeable. Some of the necessary technologies, such as electrically heated steam cracker

furnaces in the chemical industry, still require considerable development. The ambitious emission reduction targets in every sector make a determined and swift adjustment of the existing political framework inevitable. Only this will trigger urgently needed investment decisions leading to technology shift and paving the way for greenhouse gas neutrality.

188 Mt CO²e emission gap in 2030 with current instruments GHG emissions in Germany 1990–2030 Mt CO2e

Current policy path Target path

1990

1.249 Mt 1.200

1.000

2019

626 Mt

810 Mt

with existing instruments

800

188 Mt gap to target

438 Mt

600

65% reduction target according to new Climate Change Act

0 1990

2015

2020

2025

2030

Main existing policy instruments as the basis for current policies path development H Carbon pricing: BEHG* and ETS H Coal phaseout by 2038 H EEG** expansion path H Building subsidies (BEG*** + immediate program) H RED II and CO² emission performance standards H Exemption from truck toll for e-/hydrogen trucks H Environmental bonus, vehicle tax exemption, and reduced company car tax for e-/hydrogen cars * BEHG = Fuel Emissions Trading Act ** EEG = Renewable Energy Act *** BEG = Federal Funding for Efficient Buildings Note: 2021 emissions based on Agora Energiewende analysis Source: German Environment Agency (2021) GHG emissions data; Agora Energiewende (2021) Abschätzung der Klimabilanz Deutschlands für das Jahr 2021; BCG analysis 9

Climate neutrality 2045 The comprehensive transformation requires a fundamental switch in all sectors. The accompanying political instruments need a swift and targeted adaptation.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

A programme for climate and Germany’s future development Additional instrument to existing regulation

INDUSTRY

TRANSPORT

BUILDINGS

ENERGY

Make fossil fuels less attractive EU ETS, higher carbon pricing in non-ETS sectors (where enforceable), energy taxes based on energy content and sustainability level

incentivise switch to electricity Reduction of electricity prices for renewable heat applications in the industry and building sector OVERARCHING INSTRUMENTS

National infrastructure program Expansion of power grids, district heating, and rail; development of national infrastructures for e-mobility, hydrogen, and CO2

National biomass strategy Redistribution into large-scale industrial and district heating plants (in the future BECCUS), phase out of subsidies for use in buildings and decentralized power generation

SECTORSPECIFIC INSTRUMENTS

RESEARCH

COMPENSATION AND FINANCING

Carbon contracts (CCfDs) Promotion of green products and heat

Charging/H2 infrastructure subsidy Investment grants for ramp-up

Municipal infrastructure planning for planning security at all levels

Renewables offensive Area quotas, faster procedures, etc.

Investment incentives for renewable industrial heat

Purchase incentives for electric cars to align acquisition costs

Mandatory renovation schedules Accelerated grid expansion Building-specific Faster procedures at all levels zero-emission path

Efficiency standards and subsidies Increase and accelerate depreciation

Carbon-based truck toll in addition to toll exemption for e/H2

Modular building subsidies for renovation and energy carrier change

Flexibilized electricity consumption Digitalization, market incentives, etc.

Green lead markets e.g., through quotas

PtX quotas and auctions Investm./planning security in ramp-up

Renewables req. in new buildings 100% GHG-neutral heat at installation

Central capacity market to ensure security of supply

Research and innovation agenda Fundamental climate research, targeted investments in game-changers (batteries, quantum computing, etc.), accelerated scaling (high-temperature power-to-heat, CCUS, etc.)

Carbon leakage protection Free allocations, CBAM, exemptions, hardship funds, EPC

Social compensation Basic provisions, hardship funds, (partial) elimination of the Renewable Energy Act levy, etc.

Funding sources Combination of savings, levies, taxes, and debt to finance fiscal burdens of up to €50B per year in 2030

Climate governance Stronger bundling and more central coordination of political responsibility, monitoring of leading indicators, acceleration of procedures, capacities for states/municipalities, etc.

POLITICAL PROCESS

Broad societal consensus Consensus on infrastructure expansion, fair burden-sharing, etc., spanning multiple legislative periods

Source: BCG-Analyse

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

Launching a national infrastructure programme

considerable reconstruction of industrial installations in Germany. Policymakers should use the coming decade to finally tackle a reform of the administrative procedures and grievance redress mechanisms.

Reaching the climate targets outlined above, requires nothing less than a fundamental reform of planning and approval procedures. The ambitious targets leave no time for years of planning and approval procedures for industrial plants, new transmission lines, wind farms, railways, hydrogen and CO₂ pipelines or new railways.

Germany needs a revolution of planning and approval procedures and speed up the development of charging and refuelling infrastructures.

The target path of this study clearly shows that the government has to establish a framework enabling to build enormous power generation capacities and the corresponding grid infrastructure at a much faster pace than before. We need to double the expansion of renewable energy compared to the current EEG expansion path.

In addition, the transformation requires the construction of over 40 GW of flexible H2-ready natural gasfired power plant generation capacity until 2030. The net expansion of PV, offshore wind and natural gas-fired generation capacities in the target path to 2030 alone already exceeds the current installed corresponding capacities of these generation technologies in Germany.

Moreover, the transformation also requires the expansion and construction of the corresponding grid connections for electricity, district heating, natural gas, hydrogen and CO₂. Furthermore, the grid regulator has to expand its most ambitious Network Development Plan for electricity and bring it forward by five years (2030 instead of 2035). This, together with the near doubling of the grid infrastructure envisaged in the study’s target path, requires a national infrastructure programme that significantly shortens planning and approval procedures for new energy infrastructures.

Revolution of planning and approval procedures Planning and permitting procedures have become a massive obstacle to investments. The duration of procedures has almost doubled in the past ten years. At the same time the personnel situation in the approval and technical authorities is deteriorating. Across different political parties, programmes promise an acceleration of procedures in the context of climate protection.

Reaching the aforementioned climate targets requires a 12

It is crucial for the federal government and in particular state level governments to provide the financial resources necessary to ensure sufficient staffing and expertise in the authorities across the board. Authorities should also promote the continuous further qualification of personnel. Since regulations at the European level have a major impact on planning and permitting procedures, Germany must ensure that no new procedural obstacles come about at the European level, particularly with regard to the regulations pending within the framework of the “Green Deal”.

At national level, the government should use all existing scope for simplifying procedures and extending them in terms of technical legislation. It should be possible to submit documents on detailed planning later in the process, and the possibility of “early start of construction” should be used at earlier stages and more extensively.

Legally binding standards such as Technical Instructions (Technische Anleitungen) have to be developed with stakeholder participation in order to reduce both the number and the scope of expert reports.

A public hearing should only take place at the request of the developer. The project developer should be free to decide, as with his investment decision he bears the risk of the procedure and thus also the risk of possible delays due to legal action. In cases where a public hearing is held at the request of the developer, a standard should be drawn up to regulate and structure the process and procedure of the public hearing. The rapid and comprehensive digitisation on the administrative side offers the potential to significantly accelerate approval procedures. Consistent digitisation of all processes can help to reduce personnel costs and increase speed. For the BDI, the development of uniform software throughout Germany and a comprehensive portal for public authorities and the associated adaptation of the legal framework are both necessary and advisable.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

Ambitious development of refuelling and charging infrastructure

Advance the development and expansion of a hydrogen and CO2 infrastructure

In order to achieve the extremely ambitious share of new registrations in the area of mobility with alternative drives by 2030 envisaged in the study, a considerable part of the development of an efficient and demand-oriented charging and refuelling infrastructure would already have to be built within the next nine years. This would require investments of around €74 billion by 2030 already. This development must take place well in advance of the market ramp-up of alternative drive systems in order to alleviate users’ concerns about a lack of charging and refuelling facilities.

Crucial for the establishment of a hydrogen market and for the development of a functioning carbon cycle are the respective infrastructures that are available throughout the country.

Due to the continuing economic gaps in the development of a nationwide charging and refuelling infrastructure, state grants for operating and investment costs are necessary until at least 2030 in order to optimise charging point capacity and distribution across the country.

The amount of funding depends on the usage scenario of the charging point. An analogous funding regime must be ensured for the development of a needs-based refuelling infrastructure of 500 hydrogen filling stations for around 52,000 H₂ trucks, which could also be used by fuel cell passenger cars. From the BDI’s point of view, a fundamentally technology-open approach is also indispensable in the development of charging and refuelling infrastructures. For this reason, it is also important to continue to focus on the potential of an already available infrastructure for overhead line transport along the federal motorways, to continue the demonstration projects unchanged and to implement politically planned innovation corridors planned by politicians.

Simultaneously, the development of a global supply of greenhouse gas-neutral energy sources and raw materials must be driven forward, because Germany will be dependent on substantial energy imports in the long term even if extensive electrification is successful. As early as 2030, 36 TWh of synthetic fuels (PtL) will have to be imported for the national transport sector alone in order to meet climate targets. Quota targets are not sufficient to provide the necessary investment incentives in international production facilities. Support mechanisms, such as those proposed by H2Global, are also necessary for the market ramp-up.

An assured connection to such infrastructures is crucial for investment decisions in hydrogen-ready plants.

This includes both the H2 pipeline connection to the coast and the construction of electrolysers close to the site or close to consumption. An industrial company will not be willing to invest heavily in a plant if secured access to a supply of climate-neutral hydrogen cannot be guaranteed. For this reason, investments should be made in the development of hydrogen and CO₂ grids as soon as possible and the necessary regulatory framework for the well-functioning of such infrastructures must be created.

For hydrogen infrastructures to be rolled out quickly, the first step needs to be as pragmatic as possible: The BDI is in favour of including a technology-open definition of hydrogen in the regulatory framework for gas in order to enable the operation of hydrogen networks and the conversion of natural gas networks to hydrogen networks. This framework needs to be harmonised at European level to enable the cross-border transport of hydrogen. An integration of hydrogen into the existing regulatory framework for gas implies a financing of the new H2 infrastructure via the existing gas grid tariffs.

As long as this does not lead to a significant increase in gas grid tariffs, BDI considers this to be the most feasible approach to enter a hydrogen infrastructure as quickly and cost-efficiently as possible. Any stranded assets arising from a later dismantling of the gas grid would thus be absorbed by the hydrogen customers, whose number is expected to increase over time. Separate network charges (H2/natural gas) are conceivable at an advanced stage of development of the first hydrogen trunk network.

For an economically efficient expansion of H2 and CO₂ networks, it makes sense to build them using the existing gas infrastructure wherever possible and to lay new pipelines only if the use, optimisation or reinforcement of existing resources is not possible. Industrial cluster regions, in particular, should first be networked so that they can then be gradually expanded throughout the 13

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

country. Successful implementation of sector coupling also requires integrated planning of natural gas, H2 and CO₂ networks in coordination between gas and electricity network operators. In addition, planning, approval and construction of the pipelines can be combined in this way and thus streamlined in terms of time.

In parallel to the hydrogen network, the development of a CO₂ infrastructure must also begin in the coming years in order to achieve the climate neutrality target by 2045. The capture of CO₂, e.g. from industrial processes and from biomass firing, only makes sense if the CO₂ can subsequently be transported, for example to a geological storage site or for use in a carbon cycle.

In principle, for the period in which there is not yet a nationwide hydrogen infrastructure, the development of on-site or near-consumer hydrogen production must also be made possible for industries that already have an essential demand for hydrogen. Without an appropriate regulatory framework, the industries concerned in particular will not be in a position to make timely investments in emission-free hydrogen production.

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In order to establish such a CO₂ transport network, the eligibility of CO₂ networks must be ensured and the legal framework for CCUS as a whole must be reformed.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

Pushing ahead with the expansion and conversion of district heating

as 70 per cent in freight transport. This upswing is not possible without a considerable increase in the capacities of the rail network. This requires, firstly, significantly increased investment and, secondly, rapid action due to the long time required for planning and approval procedures. The network must be upgraded to meet the demands of both passenger and freight transport and modernised with ETCS technology and digital signal boxes. Measures to maintain the substance of the network should be designed operationally in such a way that outages and restrictions due to construction work are kept to a minimum. Approval procedures should be expedited, for example through the use of legislation on specific measures for infrastructure development (Maßnahmengesetze) and the modernisation of the European legal framework in environmental law.

Increased funding for investment and the reduction of operating costs through subsidies for track tariffs and the use of railway facilities, as well as a reduction in existing multiple burdens on rail in the form of taxes and levies on energy, can stimulate greater use of rail as a mode of transport.

In the building sector, heating networks make an important contribution to decarbonisation, especially for the heat transition in urban areas. In the industrial sector, district heating is used especially in the medium temperature range. The expansion and conversion of district heating networks must be promoted in an infrastructure programme. This applies in particular to urban areas.

The political framework conditions for the expansion of heating networks, combined heat and power generation (CHP) and the use of renewable energies in heating networks must be further improved. In this context, it is important to ensure the necessary planning security for companies.

More speed in rail expansion For the 2045 climate path, railways will have to increase their transport performance extremely: by 50 per cent in passenger transport compared to 2019; by as much

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

Carbon pricing: a key instrument, but not sufficient on its own

CO₂ levy as well as emissions trading are conceivable.

In the long term, the German government, the EU Commission and the member states are called upon to work at the level of the United Nations and the G20 for a global carbon price, and at least for the introduction and linking of national carbon pricing systems. In this context, work must also be done to broaden and harmonise the regulatory instruments introduced at national and EU level. The same applies to a transparent, globally accepted carbon tracking system at product level, without which it will ultimately not be possible. Internationally valid (i.e. jointly developed and applied with other countries) definitions and product standards for green steel, green chemicals, green cement, green fuels, recycling volumes, etc. are another field that requires rapid work.

Fair carbon pricing for a level playing field The BDI is committed to fair competitive conditions for German industry in the international environment.

German industry is already contributing to achieving climate neutrality with innovations and it is determined to make further significant contributions. This requires an appropriate political framework to promote innovation and investment. Effective carbon pricing is a crucial framework condition so that the transforming industry can survive in the global environment.

The BDI advocates a global carbon price that is as global as possible so that the climate can be effectively protected worldwide. The result of the previous study was and is that an ambitious global carbon price is necessary for this. To this end, more political initiative is needed to strengthen international cooperation, for example in the form of climate clubs. The guiding principle for international cooperation must be cooperation instead of confrontation. The business community has an important role to play in promoting cross-border cooperation on carbon pricing among its own governments and international partners. If this is done globally, it can become the central climate protection instrument. The sooner a common carbon price – or at least a convergence of pricing efforts – can be achieved, the more effectively emissions can be reduced. It is irrelevant which concrete instrument a state uses for pricing. A CO₂ tax or

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It is important that the scope of the instruments is defined jointly and that the carbon price applies to all emissions within the scope. At the same time, compensation and exemption regulations for countries with higher carbon prices must remain possible. This is the only way to ensure that industries in countries with higher climate protection ambitions are not disadvantaged.

In the EU ETS, CO₂ prices have now risen significantly (to around €60 per allowance). This increase has significantly increased the carbon leakage risk and requires measures to mitigate this risk. If prices in the EU ETS rise even further, or if levies on further locally/regionally non-tied activities are added in the next few years, the risk of carbon leakage will increase significantly once again. The carbon leakage risk will become significantly higher as CO₂-emission-intensive sectors in the EU come under increasing competitive pressure, so that negative effects for companies and their employees are to be feared here.

Effective carbon leakage protection is essential – are climate clubs the solution?

Countries that have a similar position on the pricing of greenhouse gas emissions agree on a common emissions price and form a “club”. Other countries can join this club if they apply the agreed carbon price. Members can freely exchange goods and services with each other. Non-members of the club can only trade with it if they pay a tariff or border adjustment. The carbon border adjustment could therefore possibly function as a kind of interim solution until the climate club has a sufficiently large number of members. The proposal for a carbon border adjustment presented by the EU Commission is still rather vague. Before the instrument can be tested, the Commission should clarify its ideas and, if necessary, develop them further. Should a border adjustment actually be introduced, a solution for neutralising the inevitably associated increase in export prices is indispensable in particular.

The fact that politics is concerned with climate clubs confirms once again that the differing climate ambitions of the major emitters are a dangerous problem for the competitiveness of German and European industry. This

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

core problem cannot be solved with problem descriptions and woolly declarations of intent. What is needed are very rapid, very concrete steps and robust agreements to effectively prevent carbon leakage. In view of the considerable differences in existing carbon pricing systems and ambitions around the world, there would need to be clear incentives to join a climate club and truly uniform carbon pricing systems. This includes strict application of carbon leakage safeguards to members outside the club. At the same time, such safeguards must also be applied within the climate club as long as no level playing field has been created between the alliance partners. For companies, with each tightening of EU targets the widening gap between the ambitions of the EU and the ambitions of our competitors is already a problem that becomes more pressing every day.

Carbon pricing for a switch to greenhouse gas neutral alternatives

To protect industry, the current system of free allocation of allowances and electricity price compensation should therefore be continued until a truly effective alternative for effective carbon leakage protection is available. In this context, the sufficient level of free allocation plays a decisive role. The EU Commission’s proposals in the Fit for 55 package do not take into account that the drastic reduction of free allocations in the EU ETS significantly limits the investment power and investment opportunities, especially of energy-intensive industry.

Decarbonisation needs massive investments and therefore sufficient free allocation in any case. Investments must be profitable. Projects/investments that demonstrably reduce CO₂ must be given special consideration in the context of free allocation. Business models and the investment strength of companies must not be undermined by too rapid a reduction in free allocation. The instrument of free allocation is conducive to investment and must be supported by other instruments (transformation funds, CCfDs). For smaller industrial plants that do not participate in the EU ETS, comparable framework conditions including for carbon leakage protection must be created.

The transformation task in the transport sector cannot succeed without a carbon price for road transport. At the same time, however, a carbon price is not a panacea. For an accelerated market ramp-up, sector-specific incentives and instruments such as purchase premiums or quotas for alternative fuels are always needed. In terms of European design, the introduction of a “new ETS” for roads and buildings, which is planned as part of the Fit for 55 package and which should contain separate systems for the two sectors, must be coordinated with the planned revisions of the Effort Sharing and Energy Tax Directives and aligned in a competition-neutral way. In addition, the planned revisions of the CO₂ fleet regulation and RED II, among others, need to be flanked by a technology-open design. The authors of the study assume that – even if the European Union succeeded in establishing the previous national emissions trading system for road transport (SESTA) at the European level within the framework of the Fit for 55 package – the European carbon prices would not reach the national carbon prices currently set by the SESTA. However, the level of the carbon price is essential for the size of the transformation task. For this case, the authors of the study propose to add an additional CO₂ component for road transport in Germany via the energy tax. However, the legal feasibility of this still needs to be verified. In any case, the corresponding proposals of the EU Commission to amend the EU Energy Tax Directive with the entire Fit for 55 package must be implemented quickly. A merger of the then still separate emissions trading systems for buildings and transport with the existing one for industry and aviation should be examined at the end of the 20s.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

Incentives the switch to electricity

instruments, which these recommendations for action comment on in detail. A prerequisite for the electrification of many processes and applications is a sufficient supply of electricity from renewable sources.

At present, a wide range of production and heating processes in industry, but also in the building sector, are based on natural gas. It is necessary to create the appropriate framework conditions so that the switch to electricity (and the associated electrification of heating processes) can be made economically viable for companies.

According to the study, comprehensive electrification of a wide range of processes is necessary to achieve the underlying climate protection targets. These include, in particular, industrial heating processes (power-toheat), new production processes based on electricity, the supply of heat to buildings and the electrification of transport sector. In addition to the direct conversion to electricity, other decarbonisation technologies are also associated with higher electricity requirements.

By 2030, the target path anticipates an additional electricity demand of 63 TWh through power-to-heat alone, which corresponds to the entire electricity demand of a country such as Switzerland or the Czech Republic. Currently, the switch from natural gas to electricity through power-to-heat is not economically feasible for many companies. To get on the path to climate neutrality, this switch must be made economically feasible for companies. To this end, this study proposes a number of

18

Abolish the EEG levy and co-finance grid fees Among other things, the study proposes financial reliefs and levy exemptions for power-to-heat or electrification in industry and heat pumps for buildings. Abolishing the EEG levy and reducing the costs for electricity for all applications, is one publicly discussed approach. The BDI favours of a complete abolition of the EEG levy.

This functions both as an instrument for social compensation, as outlined in the study, and stimulates electrification and the switch to electricity in the context of decarbonisation as a whole. In particular, in the event of sustained state aid concerns regarding the exemptions proposed in the study for certain applications, the abolition of the EEG levy is imperative. As a further positive side effect, such abolition would result in an enormous reduction in bureaucracy.

A very broad effect for companies and private households comes from state co-financing of the electricity transmission grid fees, as laid out in the EnWG. The BDI calls for a quick implantation, since grid fees will

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Climate neutrality 2045

be the fastest-rising part of electricity prices and financial reliefs would strengthen the incentives to switch from fossil fuels to electricity.

Design a national biomass strategy

zero greenhouse gas emissions. To this end, a biomass strategy should divert biomass from current applications to industry and district heating. It is important to consider the so-called cascade use of biomass in the development of an integrated strategy.

Sustainable sourced biomass is a resource available only in limited quantities. Germany needs a biomass strategy for sustainable production and for targeted as well as prioritised use. This way the limited biomass can be prioritised for the application with the greatest possible contribution to the climate targets. This is particularly the case in industrial heating processes and in district heating. In the long-term, the use of negative emissions in the form of Bioenergy with Carbon Capture and Storage (BECCS) is necessary to reach net

Since biomass, like other residual and waste materials, is a tradable commodity a biomass strategy has to take the European perspective into account and coordinated at a European level. At present, Germany exports considerable quantities of biomass, since the sub-products created from it count towards compliance with transport sector targets in other European countries. In Germany this is not the case, which is why Germany needs to work towards a uniform legal framework to avoid unnecessary commodity flows.

19

What needs to be done now in the individual sectors Achieving national climate targets is very ambitious and complex, requiring a large number of investment decisions within a very short timeframe. To enable everyone to make these decisions, a broad mix of policy instruments is needed. This mix must include sector-specific instruments as well as cross-sectoral ones, which are justified and outlined below.

20

03

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Industry

Industry  -65 % reduction in emissions (2019 – 2030)  €50 billion of additional investment (until 2030)  

€11 billion of annual additional costs (in 2030)

&

+63 TWh electricity for power-to-heat (2019 – 2030)

4×absolute GHG reduction (from 2019 to 2030 compared to last 20 years)

The German primary industry is facing an extreme challenge: major reinvestments are imminent, and emissions must be reduced very significantly by 2030 and to almost zero by 2045. Substantial amounts of CO₂ can be saved by changing technologies. Concrete projects for climate protection investments worth billions of euros exist in some sectors and are ready for decision. Now the political framework for these projects must be provided so that the change in the second half of the twenties can succeed and the climate targets of 2030 can be achieved.

Significant parts of the existing production capacities in some energy-intensive industries must be fundamentally modernised by 2030. These investments must be made in a climate-neutral manner. A key challenge for industry is not only to make the necessary investments, but also to finance significantly higher operating costs of low carbon production processes and of carbon free energy sources in the medium term. In order to make it possible to switch, for example, from steel production based on coal and coke to hydrogen and from natural gas and naphtha as the dominant energy source or feedstock for industry to renewable electricity, CO₂-neutral hydrogen and biomass, these prerequisites must be made available to companies on site to a sufficient extent. For without sufficient infrastructure to ensure the physical availability of hydrogen in particular for the technical alternatives, price support and other support elements will remain ineffective. Where conversion of high-temperature processes is not possible for lack of technology or hydrogen infrastructure, natural gas-based operations must remain possible for the transition. Once access is secured, the costs of CO₂-free alternative fuels and processes must be comparable to those of existing production processes and natural gas in order to make a switch economically feasible. A prerequisite for carbon reductions through more recycling is the sufficient availability of secondary raw materials (e.g. scrap) at internationally competitive prices.

CO2 -neutral hydrogen plays a prominent role Some of the necessary technologies for a climate-neutral industry are already available today or are close to market maturity (e.g. the direct reduction of iron ore using hydrogen). CO₂-neutral hydrogen plays a prominent role in this context, in the steel and chemical industries as well as partially in other industrial sectors. The production of climate-friendly hydrogen at industrial sites must be made possible – independent of the amount of renewable power generation in the surrounding area – especially as long as no H2 infrastructure is available. In the chemical industry in particular, but also in today’s petroleum industry, closing material cycles (circular economy), including carbon cycles, is also a key strategy.

In the cement and lime industries, new, CO₂-efficient products and manufacturing processes and the capture of unavoidable process emissions are key technologies.

The industry now needs new political framework conditions for this upcoming major reinvestment phase.

21

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Industry

Industry: Regulation Gap of 11 billion € for 2030 Climate Target Additional cost of climate protection measures for industry in 2030 Billion €, real 2019

IMPACT OF INSTRUMENTS IN THE REFERENCE PATH, E. G.: H National Emissions Trading System of 80 €/t CO²e in 2030 H EU ETS: of 90 €/t CO²e in 2030 (for emissions exceeding free allocation) <1

1

1

BEHG ETS

Renewable industrial process heat CCUS/BECCUS for cement and lime Steam crackers and material decarbonisation in chemistry

5

<1

5

11

<1

11

4

4

Green steel

2 Efficient processes in industry

Additional Cost in 2030

2

-1 Instruments in Reference Path

Regulation Gap in 2030

* referring to permanent storage of CO² or permanently chemically bound CO² Quelle: BCG-Analyse

New instruments and stable framework conditions are crucial Targeted instruments include investment incentives, carbon contracts for difference, lead markets for green raw materials, quotas for greenhouse gas-neutral products and product lines, and a targeted procurement strategy by the federal government and the Länder (Green Public Procurement). If the necessary developments are initiated quickly now, Germany can become a technology leader in low carbon key technologies. Climate-neutral industry must be conceived as a showcase project, i.e. industries in other countries must also be encouraged, not to say “inspired”, to transform. Based on a strong domestic market, this will result in global market potential in the billions.

22

Accelerate innovation Due to the extremely ambitious targets set out in the amended German Climate Protection Act (KSG) and the comparatively short time available to achieve them, fundamental innovations are required for the climate-neutral production of steel, chemicals and cement. Incremental efficiency improvements are still important but will no longer be sufficient. Nevertheless, technological innovations need time and the right political and social (acceptance!) framework. In industry, innovations and their implementation usually take well over a decade, from the initial basic research, through technological feasibility studies and pilot and demonstration plants, to market launch. The impact of new low carbon/free key technologies by 2030 is therefore limited, making their accelerated introduction and the early establishment of corresponding infrastructures all the more important.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Industry

PtH: Closing the Cost Gap through Electricity Price Compensation and CCfD Cost of energy carriers in National Emissions Trading System without compensation in 2030 €/MWh, real 2019; target path

NATURAL GAS

PTH

MAXIMUM COMPENSATION

CCfD

ELECTRICITY

169

Increased CO² prices in National ETS (BEHG) 80 – 180 €/T CO²e

-106

42 – 59

-22

33 CO²-carbon price natural gas 2020

42 – 59

CO²-carbon price natural gas

2030

With BEHG prices of 80 – 180 €/t CO²e (nominal) in 2030

2030 With average price for Compensation large industrial consumers “EEG-Umlage”, electricity tax, network fees and contributions

Extra cost burden of ~ 9 Decrease in electricity price through tendering of €/MWh vs. price of natural gas 2020 CCfDs

Note on assumptions for cost of energy carriers: natural gas 38 €/MWh with ETS price of 90 €/t CO²e (nominal), natural gas 42-59 €/MWh with BEHG price of 80-180 €/t CO²e (nominal), electricity 69-167 €/MWh depending on quantities consumed and the rules for compensation Source: BCG analysis

Industries need support Extensive state support is necessary if the politically desired (or “state-imposed”) reduction of the time period available for the introduction of the new production processes is to succeed. Implementation is highly complex in political and regulatory terms. There are no simple answers. A broad mix of instruments with sector-specific measures is needed to make investment in and use of renewable technologies much more favourable than they are today. The decisive factor will be to shape the framework conditions in such a way that the enormous investments required from an economic point of view also pay off in business terms for the individual investor (i.e. above all for citizens and companies). The expansion and conversion of infrastructures must be implemented quickly, because the right course must be set today for zero emissions in 2045.

As a concrete support measure, the securing of internationally competitive energy costs should be tackled quickly.

This includes the full retention of existing relief regulations for industry as well as a reduction in the prospect of rising costs, especially for electricity grid charges. The grid fee relief through state subsidies, which was anchored in the course of the coal phase-out, should be implemented (Section 24a (2) EnWG), as it is an important contribution to relieving the burden on industries, and it encourages the switch to electricity. In addition, there is a need for a successor regulation for a specific energy tax relief (Spitzenausgleich), which expires at the end of 2022, to ensure internationally competitive electricity prices for industry in the future. The compensation instrument for energy-intensive companies set out in § 55 of the Act, that regulates the coal phase-out in Germany (“KVBG”), must also be implemented.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Putting the energy system on the path to carbon neutrality

Putting the energy system on the path to carbon neutrality  -58 % emissions reduction (2019 – 2030)  €415 billion additional investments (until 2030) &

42 % Growth in electricity demand (2019 – 2030)

+43 GW H²-ready gas-fired power plants 266 GW installed capacity wind and PV (2030)

42% Growth in electricity demand 2019 – 2030

24

The envisaged switch to electricity comes with emission shifts between sectors. If industrial processes that are currently based on natural gas are electrified or people switch to electric vehicles, it reduces emissions in the industrial or transport sector and shifts emission to the power sector. The 42 per cent growth in electricity demand by 2030 described in the study’s target path illustrates this development. Despite all efficiency gains, electricity consumption reaches 722 TWh in 2030, which illustrates the imminent large-scale shift to electricity and the associated emissions shifts.

The German Climate Change Act 2021 sets the 2030 emissions target for the power industry at 108 million tonnes of CO₂ equivalent, regardless of electricity consumption. The power industry therefore faces the challenge of supporting other sectors to avoid carbon emissions by electrification, phasing out coal-fired power generation and CO₂-neutral nuclear power generation. At the same time, the power sector has to go beyond cutting emissions in half from 2019 to 2030.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Putting the energy system on the path to carbon neutrality

Double the expansion of renewable energies

increasing the renewable expansion paths, the study proposes a change of the EEG remuneration in order to reach the envisaged renewable capacities. This would result in a change from the current sliding feed-in premium to a symmetrical market premium also called contract for difference. This reduces market risks for investors and increases the chances of realisation (keyword winner’s curse). It means that operators of new EEG-subsidised plants receive a premium when market prices are below their strike price just as with current sliding feed-in but make repayments to the EEG account at market prices above the strike price.

A prerequisite to reach the proposed target path is the doubling of the expansion of renewable energies compared to the current expansion path in the EEG. The study highlights that green electricity at competitive prices is key to achieve the climate targets. The measures and instruments described, such as the production of green hydrogen, electrification and the switch to electric vehicles, presuppose a multiplication of electricity generated from renewable sources. The 2030 target path envisages renewable capacities of 140 GW PV, 98 GW onshore wind and 28 GW offshore wind. Alongside

25

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Putting the energy system on the path to carbon neutrality

Massive deployment of Wind, PV and flexibile capacity Net generation capacity 2019 – 2045

621

GW

REFERENCE PATH

TARGET PATH

346 285 225 26

60

53

20

83

54

70

26 53

10

86 28

23

98

31

49

2019

139

225

61 33

69

31

384

54

38 23

91

85

2030

2045

2019

180 21

39

74

88

2030

2045

Necessary natural gas capacity for premature, complete phaseout of coal-fired power geneartion by 2030 Nuclear

Lignite

Coal

Natural gas**

Other

Storage

Hydropower

Biomass/ decentralised biogas*

Wind onshore

Wind offshore

Solar PV open field

Solar PV, rooftop

* Solid biomass and decentralised conversion of biomethane into electricity (currently) in Renewable Energy Act (EEG)-funded plants ** Displayed capacity for 2019 includes next to active plants also reserve power plants and mothballed power plants Source: BCG-analysis

Land-use quotas for renewable energies Higher volumes of renewable tenders and a change in the market premium are of little help if there is not sufficient land available for the construction of PV and, in particular, wind energy plants. A land-use quota (e.g.

2 %) can address this bottleneck. Accordingly, municipalities should be obliged to designate corresponding areas for renewable energies, taking settlement areas and other excluded areas into account.

Accelerate procedures increase the pace of grid expansion The strong increase in electricity demand identified in the study poses extreme challenges for grid expansion and requires a near doubling of the grid infrastructure.

The most ambitious transmission grid expansion path in the Federal Grid Development Plan has to be brought forward by five years (2030 instead of 2035). In addition, the new government has to accelerate planning and approval procedures significantly. It is key to plan the expansions of electricity, natural gas, CO₂ and hydrogen networks in a coordinated way and not independent from one another. The study proposes the use of fictitious approvals and the creation of additional capacities 26

at authorities and courts, such as a special panel at the Federal Administrative Court. Another instrument proposed for the necessary acceleration is the examination of project applications by external service providers.

Lengthy planning and approval procedures are a key obstacle not only to grid expansion, but also to the expansion of renewable energies. Here, too, simplified approval procedures for repowering, more stringent deadlines and, if necessary, fictitious approvals could help.

Digitalise energy consumption and incentivise flexibility Making electricity consumers more flexible is a fundamental pillar in an energy system with primarily volatile generation. The digitalisation of grids in an increasingly diversified and decentralised supply infrastructure with flexible consumers is a key prerequisite for a higher level of flexibility. Only the digitisation enables displaying and load flows and controlling them intelligently. This in turn means that grids can be better utilised, and one can reduce the need for grid expansion. There should be a mandatory monitoring process to transparently track the progress of digitalisation.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Putting the energy system on the path to carbon neutrality

Flexibilisation of new consumers critical for security of supply Inflexible capacity and available generation capacity at peak demand 2019 – 2030 GW; target path PEAK DEMAND 2019

EFFENCIES

HEAT PUMPS

E-MOBILITY** **

POWER-TOHEAT

BATTERIEFERTIGUNG

ELECTROLYSIS

CARBON CAPTURE <1

7

77 5

7 2h Load shifting*

PEAK DEMAND GUARANTEED 2030 CAPACITY*** ***

101

5

101 4

4

2

8 9 7

5 6h Load shifting

12 h – 24 h Load shifting

12 h Load shifting

Up to 168 h Load shifting 28

24 96 Safety margin (5 %) Peak load / inflexible loads

DSM Electrolysis

Wind at sea Wind on land

Biomass / decentralised biogas Water

Memory Other

Natural gas Hard coal

15

2

Natural gas capacity 2019 Necessary new natural gas capacity to replace nuclear and reference path coal phase out Necessary natural gas capacity for premature, complete phaseout of coal-fired power geneartion by 2030

Lignite Share of flexible loads

* load shifting via installation of heat storage; heat pump with average coefficient of performance of 2.0 ** e-mobility assumes that charging can be shifted at times of low power availability; no assumpton of discharging of batteries *** thermal capacity with 90% availability; note: availability of shifting: heat pumps (85%), e-mobility (80%), PtH district heating (90%), PtH industry (20%), battery production (10%), electrolysis (60%), carbon capture (0%) Source: Fraunhofer ISE, BCG-analysis

One should note at this point, that above all, making one’s electricity consumption more flexible has remain voluntary. State production planning must not be the result of mandatory flexibilisation. The intended flexibilisation of consumption should no longer result in higher grid charges. New market mechanisms could create price incentives to shift electricity consumption to times with a low residual load and avoid grid bottlenecks at the same time. Examples of such price incentives are time-variable grid charges and availability-variable electricity tariffs.

In this context, the proposed central capacity market can be considered as one of several options. One should examine which form of a capacity remuneration mechanism can stimulate the addition of flexible capacity in the most economically efficient and least market distorting way. Another task in the course of introducing a capacity remuneration mechanism, is to clarify how the switch in the 2030s from natural gas to hydrogen can take place and how EU-taxonomy conformity can be guaranteed.

A capacity remuneration mechanism for flexible and H2 -ready natural gas-fired power plants The study’s target path requires on a net addition of 43 GW of natural gas-fired power plants by 2030 in order to maintain security of supply and remain within the emissions budget. This capacity addition is of an unprecedented order of magnitude for which market signals from the energy-only market will be insufficient.

Considering the few remaining years until 2030, the study recommends a central capacity market to stimulate this net addition of flexible and H2-ready natural gas-fired power plants.

27

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path mobility until 2030

Transformation path mobility until 2030  -48 % reduction in emissions (2019 – 2030)  €220 billion additional investments (until 2030)  

Blending by 2030 > 22 % green fuels (H², PtL, biofuels) | > 3.3 million t PtL import



Switch to rail by 2030: + 40 billion passenger-kilometres; + 22 billion tonne-kilometres

Share of new registrations of battery-electric passenger cars 2030 < 90 % | stock < 14 million.

Maximum ramp-up of electromobility and ambitious blending of carbon neutral fuels The national climate targets require a reduction in CO₂ emissions in the transport sector to 85 million tonnes by 2030 and climate neutrality by 2045. The BDI study Climate Paths 2.0 outlines the extremely ambitious transformation path required for this: It leads to an accelerated market ramp-up of alternative drive systems with a particular focus on electromobility for passenger cars and commercial vehicles as well as power-based fuels (renewable fuels of non-biological origin, RFNBO) and advanced biofuels for the indispensable

climate protection contribution of the existing passenger car fleet. The prerequisites are the timely and ambitious expansion of refuelling, charging, transport and energy infrastructures and the provision of 100 percent renewable electricity for electromobility and RFNBO. Also, incentives must be created to ensure the market ramp-up of alternative drives and fuels. The marketable availability of RFNBO is also crucial for climate neutrality in air and maritime transport as well as the remaining non-electrified rail transport. The two levers – modal shift and increased efficiency – must remain to be pushed with uppermost ambition.

Transport: Drive change with greatest GHG reduction contribution Reduction of GHG-source emissions in the transport sector 2019 – 2045

Reduction in international air and maritime transport 2020 to 2045 Reduction from 2020 to 2030 Reduction from 2031 to 2045

Million tonnes of CO² equivalent

164

4

7

5

5

122

14 19

47

79

Reference path 70 96

2019

42

42

5*

21

85

Development of transport performance

Change of mode of transport

Efficient Drives

Drive change

Green fuels**

Reduction in years

Increase in road freight transport

From passenger car, truck and airplane to busses, rail and inland waterway vessels

Drive efficiency and smart transport management

BEV in passenger cars, BEV and FCV in trucks

PtL and biofuels in remaining vehicle fleet, air and maritime transport

Target path Reduction according to climate paths

In the reference path, too, a substantial drive change is expected by 2045 – but development will be slow

*In 2030 reduction of 21 Mt CO²e with the help of green fuels vis-à-vis 2019. But in 2045 5 Mt CO²e less savings than in 2030, as fewer green fuels will be used in national transport due to the change in drive. This results in a reduction of 16 Mt CO²e by green fuels in 2045 compared to 2019. ** H² in fuel cell drives included under drive change | Note: Source balance without emissions from electricity | Source: BCG-analysis

28

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path mobility until 2030

Assuming that the tightened sectoral target for climate protection in transport is to be achieved without any loss of mobility for the population and the economy, and in a socially and economically balanced manner, the focus in the remaining nine years must be on a coherent bundle of instruments. This must be implemented in a way that is open to all technologies and consistent with the Fit for 55 projects currently being discussed at European level. The BDI study Climate Paths 2.0 concentrates on which instrument bundle can be used to implement the two central levers of drive and fuel change. Levers that are not addressed in depth in the study but are indispensable for achieving the climate protection target in transport are modal shift and increased efficiency, also on account of digitalisation.

Drive and fuel-switching technologies widely available: Strengthen incentives for market ramp-up According to Climate Paths 2.0, two instruments could stimulate the accelerated ramp-up of electromobility for passenger cars: Comprehensive investment support for the rapid development of charging and refuelling infrastructures and the continuation of purchase incentives for alternative drive systems to the extent required by the actual market ramp-up. The drive change in road freight transport must be promoted above all by continuing and strengthening the incentives for alternative drives in the truck toll until battery-electric and fuel cell trucks are available broadly in the market. A technology demonstrator program should be launched for alternative powertrains in aviation. The market ramp-up of RFNBO (according to the study exclusively power-based liquid fuels: Power-to-Liquid, PtL) must be secured by means of appropriate quotas and a funding mechanism.

If the ramp-up of electrification is slower than estimated by the authors of the study, the blending rates for carbon neutral fuels in particular would have to increase more quickly in order to achieve the national climate targets for transport. However, reaching the climate target in 2030 alone requires at least 22 per cent of blending of green fuels (PtL, H2, biofuels), including at least three million tonnes of PtL. If the ramp-up of electromobility succeeds more quickly, more RFNBO can already be made available directly before 2030 for international transport in air and maritime transport, which will also be dependent on these fuels in the long term, even if battery-electric or hydrogen drives become available.

2030 9,3 million Charging points at home

4,7 million

Charging points at the employer

1 million

Publicly accessible standard charging points

0,24 million Quick charge points

500 H² refueling stations for cars and trucks, others for aircraft and rail vehicles

Two key instruments could flank this transformation: increased support for the development of efficient and demand-oriented charging and refuelling infrastructures for passenger cars, commercial vehicles, aircraft, and rail vehicles and carbon price signals for road transport. The development of charging and refuelling infrastructures must take place well in advance of the market ramp-up of alternative drive systems in order to alleviate users’ concerns about the lack of charging and refuelling facilities. A carbon price signal should result from a European emissions trading system for road

29

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path mobility until 2030

transport and from the restructuring of the energy taxation, as is currently being discussed at European level.

open the existing incentives to all technologies because of the continuing uncertainties regarding future European and international market developments. Plug-in hybrids (PHEV) and fuel cell vehicles also contribute to achieving the climate targets and, thus, must continue to be included.

Promoting a change of drive system for passenger cars through purchase incentives for battery and H2 passenger cars The market offering of electric vehicles from German and foreign manufacturers in Germany is diverse, but not all types of usage, e.g., long journeys with a lot of luggage and several people, are currently covered by battery electric drives in the passenger car segment. Direct acquisition costs affect primarily the decision in favour of a private passenger car. Fuel and maintenance costs play a secondary role. While the comparison between two combustion engines is still easy, many consumers are not aware of the currently still low costs of operating an electric car. The central instruments for accelerating drive change for passenger cars, therefore, remain purchase incentives via a purchase premium or via vehicle and company car tax, which will be successively reduced after 2025 and will have to be phased out in the long term. Close monitoring for possible readjustment is essential. The study presented focuses on achieving the national climate protection targets for transport.

Therefore, battery electric vehicles (BEV) are the focus of the funding. However, we believe it is necessary to

Drive change in road freight transport through readjusted truck tolls The market offer for alternative drive systems for trucks is currently still very limited. Further promotion must be open to all technologies, as the technology competition between battery and fuel cell trucks is still open. Therefore, a rapid change of drive systems for commercial vehicles requires a broad market offering of alternative drive systems as well as an instrument aimed at a sustainable full cost advantage of these drive systems. The truck toll has already proven to be an effective lever for fleet renewal in the past. A realigned truck toll based on the amended Eurovignette Directive from 2023 will presumably include the following components: CO₂ emissions depending on the drive system, noise emissions, and infrastructure costs. With these the existing incentives for alternative drive systems within the truck toll would continue and be reinforced. Implementation in German law must be carried out in coordination

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path mobility until 2030

with other European regulations such as energy taxation and European or national emissions trading for road transport. This is because road freight transport is already subject to considerable carbon price signals and will increase even further due to upcoming revisions at EU level.

Decarbonisation of existing fleets, aviation, and maritime transport through PtX quotas and funding mechanisms

From the perspective of German industry, the aim of the realignment of the truck toll in Germany must be to implement it in a revenue-neutral manner. What is needed is an overall balanced solution that both adequately takes into account the users’ contribution to infrastructure costs and does not jeopardise the necessary earmarked financing of road infrastructure. Distortions of competition in the form of additional purely national burdens on the German transport industry compared with international hauliers must be avoided.

Therefore, in order to balance the burdens, close monitoring and flexible adjustments to changes in the individual instruments of the carbon pricing regime for road freight transport are needed. A supplementary positive incentive for a change of drive could be provided by adjusting the motor vehicle tax for commercial vehicles.

Achieving the national climate protection targets in transport for 2030 and 2045 requires the use of considerable quantities of low-carbon and carbon neutral fuels. According to the study Climate Paths 2.0, the required PtL demand of at least 39 TWh in 2030 or 3.3 million tonnes should be ensured by importing PtL and initially also be used to decarbonise road transport by 2030. To promote the market ramp-up, the authors propose the introduction of mandatory PtX quotas for road and air transport from 2025 with a gradual increase until 2030 to secure demand. Simultaneously, a funding mechanism – based on the “H2Global” initiative – should be introduced to create investment security for early production facilities.

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Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path mobility until 2030

Long-term increasing PtL demand across all modes of transport PtL demand in transport 2030-2045

Foreign investments in PtL* 2030-2045

TWh; exclusively imports

billion €, real 2019, cumulated

115

123

39

41 3 1

1

3

96

90

10

9

35

17

36**

16**

2030

2045

2030

2045

€ 56 Billion

€ 275 Billion

54 TWh PtL road transport

295 TWh PtL rail, air and maritime transport (domestic)

Air and maritime transport (international)

All sectors

*Capacity to meet German PtL demand incl. international transports (starting from Germany) **With decreasing demand for PtL in road transport due to ongoing electrification, PtL capacities are being realloacted to international transport.

Source: BCG-analysis

In our view, this instrument still needs to be developed further, as it does not take into account the particular challenges of decarbonising air and maritime transport operating in international competition. Competition-distorting national burdens must be avoided. Policymakers are also called upon to set a decisive course in cooperation with PtL-producing countries so that quantities corresponding to the PtL quotas are also available before 2030. This also requires international standards regarding sustainability and quality criteria, international certificate trading (book & claim procedure), and international specifications for the inclusion of sustainable fuels in the carbon footprints of users and their customers.

Advancing the modal shift In addition to optimising the individual modes of transport, it is also important to optimise the interaction between them. Wherever possible, rail should take on a larger share of the transport and logistics chains. Important building blocks for this are, firstly, the appropriate upgrading of the interfaces between modes of transport.

Secondly, it is important to consider and safeguard rail access far more than before when planning new logistics 32

hubs and industrial areas. In addition to the importance of infrastructure expansion and digitisation creating the necessary capacities, targeted incentives also lead to greater use of rail for transport. The existing limitation of track access charges should be continued.

Subsidies for equipment prices help to compensate for existing cost disadvantages of rail. Reducing electricity charges is helpful to promote rail transport further, which is already electric to a large extent. The observations on alternative drive systems and fuels in road transport apply equally to railways, even if the need for these in rail transport is far lower.

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path buildings

Transformation path buildings  -46 % reduction in emissions (until 2030 compared to 2019)  €175 billion additional investment (until 2030) w .

1.9 % renovation rate p.a. until 2030, 2.1 % renovation rate p.a. until 2045 -50 % energy consumption in existing buildings (on average)

 Increase the depth of renovation to approx. 70 kWh/(m²a) consumption for residential buildings Germany-wide renovation wave and switch to carbon neutral energy sources Required technologies available – required investments challenging A renovation wave in the German building sector is needed to achieve the aspired climate protection targets. The energy consumption of existing buildings must be significantly reduced through (1) comprehensive retrofitting of the building envelope (roof, windows and façade), (2) optimisation of building operation and (3) comprehensive renewal of heating equipment. For the most part, all this can only be done gradually. The technologies to achieve the goal of “climate-neutral building stock by 2045” are already available and the technological developments will be an additional driver. A fuel switch to carbon neutral energy sources is required. This includes the possible technology open use of green gases and liquids. The use of hydrogen as an additional energy carrier can be tested in hydrogen model regions. However, the comprehensive retrofitting of buildings with technologies already available is a necessary prerequisite. The main challenges for homeowners are the high investment sums and long payback periods for energy efficiency measures.

Accelerate incentive-based path through complementary investment stimulus Renovation rates must be increased to 1.9 per cent by 2030 and 2.1 per cent by 2045. A renovation wave would be an engine of economic growth, as 80 per cent of building renovation material is produced locally in Germany. To ride the renovation wave, incentives, which are already implemented, need to be strengthened. Mandatory obligations would be counterproductive and can only be a matter of “last resort”. Citizens need information how to reach their individual efficiency goal. A renovation schedule linked with targeted renovation subsidies are therefore the empowerment which is adequate.

The aim must be to upgrade existing buildings in a holistic manner that is open to all technologies. The raising of standards for new buildings are not required. A cornerstone for this is the implementation of carbon neutral heating solutions, e.g. district heating.

33

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path buildings

Buildings: Doubling of the absolute greenhouse gas reduction compared to previous years Greenhouse gas source emissions in the building sector 1990 – 2045 Million tonnes of CO² equivalent

TARGET PATH

REFERENCE PATH

-43

210 -18 -25

167 149

-57

123

Doubling of the absolute greenhouse gas reduction compared to previous decade

-17

123

~ 2× -67

-25

106 81

67

0 1990

2000

2010

Space heating and hot water for private households

2019

2030

2045

Space heating and hot water for commerce, trade and services

Source: Federal Environmental Agency (UBA); BCG analysis

2019 Appliances and processes

2030

2045

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path buildings

Identify energy saving targets and create renovation schedules nationwide

Develop subsidies further and dismantle tax obstacles

Suitable key figures need to be development for every existing building. So, the citizen is able to understand his individual contribution to a climate neutral future.

The BDI Climate Path 2.0 study elaborated that residential building across all trades will need an average energy consumption for space heating and hot water of approx. 70 kWh/(m²a)1 in 2030. An effective tool for reaching these goals is a mandatory individual renovation schedule which has to be drawn up for every existing building latest till 2028. These schedules show the way towards climate neutrality and should additionally be linked with subsidies.

Complex measures on the building envelope (including complete window replacement) need to be treated equally with other existing measures. Therefore, the subsidy rate should be aligned to the level of renewable heating systems. A combined bonus for multiple measures should be granted to foster renovation in buildings.

Complementary measures, such as the installation of storage technology, should be included. Renovations have a long tax amortisation period, which prevents these from happening. This could be changed by granting a tax break. Important maintenance and renovation measures should generally take into account in the year they occurred even if they exceed 15 per cent of the acquisition costs of the building.

1

kWh/(m²a) = Kilowatt hour per square meter per year

35

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path buildings

2030 target needs a renovation rate of around 2 %

ONE- AND TWO-FAMILY HOUSES

APARTMENT BUILDINGS

Annual renovation rate, %

Annual renovation rate, %

COMMERCE, TRADE AND SERVICES BUILDINGS Annual renovation rate, %

3

3

1,1 %

3

Ø renovation rate in 2019

2

2

2

1,9 % 1

1

0

1

0 2020 Target path

2030

2045

Ø renovation rate in 2030

0 2020

2030

2045

2020

2030

Reference path

Remark: The definition of the energetic refurbishment rate used here refers to full renovation equivalents.

Source: BCG analysis

36

2045

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Transformation path buildings

Promotion of skilled workers – support innovation

Mandatory renovation as a matter of last resort

To ride the renovation wave the promotion of skilled workers, i.e. architects, appraisers, planners and craftsmen, is another basic requirement. The Federal Energy Efficient Decree for Public Buildings, adopted in August 2021 by the German Federal Government, could lead to labour shortage, as demand for skilled workers is higher than before. Therefore, adequate measures like (re-) training programmes or the recruitment of skilled workers from abroad have to be taken. Renovation schedules for public buildings could be a guideline for business and craftsmen to expand their workforce. Serial retrofitting (e.g. Energiesprong) should be rolled out on the public building stock. This would accelerate the renovation of public buildings, promote the instrument and apply it on a large industrial scale. The large-scale application of serial retrofitting should be accompanied by further development of the respective funding programme.

Public support for energy efficiency measures on buildings is a precious commodity. Mandatory renovation can be therefore just a matter of last resort. Instead, the already existing toolbox with its various instruments needs to be optimised to achieve the goal. If the introduction of minimum energy performance standards (MEPS) is required, these should be introduced in worst performing buildings first. MEPS should be implemented as economically feasible minimum requirements linked with a long lead time and a subsidy scheme.

37

Position | Climate Policy | Energy, Industry, Transport, Buildings Climate Paths 2.0 study – Recommendations for action

Imprint

Imprint Publisher BDI – Federation of German Industries Breite Straße 29 10178 Berlin T.: +49 30 2028-0 www.bdi.eu Editorial team Dr. Eike Blume-Werry, Senior Manager Energy and Climate Policy Department Dr. Joachim Hein, Senior Manager Energy and Climate Policy Department Uta Maria Pfeiffer, Head of Department Mobility and Logistics Department Petra Richter, Deputy head of department Mobility and Logistics Department Dr. Carsten Rolle, Head of Department Energy and Climate Policy Department Wilko Specht, Managing Director BDI-Initiative Energy Efficient Buildings Design & Implementation Sarah Schwake, Senior Manager Marketing, Online and Events Department Layout Michel Arencibia, Art Director www.man-design.net Print Das Druckteam www.druckteam-berlin.de Publishing Company Industrie-Förderung Gesellschaft mbH, Berlin

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