The EU has come out fighting carbon dioxide with a wide-ranging programme of targets, subsidies and taxes. It plans to toughen its Emissions Trading System. It will remove the free allowances for aviation, bring shipping into the scheme, and have separate trading systems for transport and buildings to drive down CO2 in those areas more rapidly. It will require the member states to spend all their enhanced Emissions trading receipts on climate and energy-related projects. There will be new regulations on land use, forestry and farming to move that to carbon neutral by 2035. By 2030, 40% of energy generation must come from renewables. The Energy Efficiency Directive will set annual binding targets to reduce energy use. Diesel and petrol cars will be banned from 2035, with tougher emissions targets before then. Fuel initiatives will require rising percentages of e-fuels for planes and ships. There will be an Energy Taxation Directive to increase green revenues, and a Carbon Border tax to hit rest of the world suppliers who burn too much fossil fuel when producing goods for export.
In the USA, left-wing Senators and Congress men and women welcomed President Biden’s proposed budget package of $3.5tn which includes substantial green investment and a possible clean energy standard. He, too, is considering a carbon border tax or tariff and argues this does not violate his campaign pledge to avoid tax rises on anyone earning less than the large sum of $400,000 a year. The Democrats hope to land both a bipartisan infrastructure programme and a much larger and more contentious Democrat spending and green programme - though they have still not guaranteed the votes of all their own Senators to the large budget currently envisaged. It is possible the President will need to drop or amend the carbon tax and the clean energy standard to get it all through his own party and the Senate under the Reconciliation procedure.
The EU’s proposals on climate change have a direct read across to the German election. Armin Laschet, the CDU leader and Chancellor candidate, has pulled ahead of Annalena Baerbock, the Green leader in personal rankings, and his party has moved around 10% ahead of the Greens in July compared with a small Green lead in May. The latest polls do not, however, yet fully discount recent events around the terrible floods parts of Germany have suffered. Laschet has been attacking the Greens and suggesting their policies would be bad news for a German economy still dependent on the internal combustion engine, coal-generated electricity, and a steel and chemicals industry that generates a lot of carbon dioxide. The floods led to Mrs Merkel’s intervention effectively backing the Greens on their key argument by saying that the floods show the need to take more vigorous action to tackle climate change. Mr Laschet also damaged himself by laughing and joking with people behind the German President who was making serious and sympathetic remarks on TV in Erftstadt, a town gravely damaged by floodwater. Mr Laschet is First Minister in the North Rhine Westphalia region which includes Erftstadt.
As a result of all this, we can conclude German politics will continue its tilt towards Green. Mr Laschet will doubtless pivot a bit under pressure over his alleged misreading of the floods, worsened by his conduct. Whilst we still accept the common view of him as the most likely next Chancellor, the polls indicate it will be difficult constructing a stable coalition government behind him. The current Grand coalition, the traffic light coalition and the Red Green coalition all lack prospective majorities on current polls. The two combinations that could produce a majority government on current figures are the Kenya grouping, CDU, SPD, and Green, or the Jamaica combination of CDU, FDP and Green.
If, as the polls suggest, the Greens come second, they will have considerable leverage - augmented by recent bad weather events. For Mr Laschet both to win and to stay in office, he will need to talk green, whilst reassuring the many votes dependent on autos, chemicals, steel, traditional farming and other energy-intensive sectors that he will not tax them too much or close them down too soon. If he does emerge as the head of the largest minority party, he will likely be backed by a weak and stretched coalition with strong green influence. Many of the big calls about climate change will be made at EU-level, leaving the German industry facing some difficult questions over how they meet the demand to get out of fossil fuels more quickly. Markets need to wrestle with both the wall of money heading for green investments and the costs of transition on traditional German business models.
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