Federal Constitutional Court compels legislators to accelerate climate neutrality

What does the decision of the Federal Constitutional Court mean for industry, energy and building management?

A significant and ground-breaking decision has been handed down by the Federal Constitutional Court, which is likely to have a considerable impact not only on national climate legislation: In its decision of 24 March 2021 (1 BvR 2656/18, 1 BvR 78/20, 1 BvR 96/20, 1 BvR 288/20), the First Senate of the Federal Constitutional Court ruled that provisions of the current Climate Change Act of 12 December 2019 (KSG 2019) are incompatible with fundamental rights.

The Federal Constitutional Court is thus forcing the further decarbonisation of industry, the energy sector, transport and the real estate market. As early as 2020, energy suppliers and industrial customers stated in a survey conducted by the German Association of Energy and Water Industries (BDEW), among others, that decarbonisation now has at least the same priority as digitalisation when it comes to procurement. In concrete terms, two developments that have also shaped regulatory advice to energy suppliers and industrial customers in the past are becoming established:

• In the future, there will be an even greater focus on long-term power purchase agreements (PPAs) with renewable energies and green gases, while the importance of natural gas, oil and coal will decline. The increasing demand for green products is driven in particular by industrial customers who are looking for ways to reduce emissions as part of their sustainability strategies. However, barriers to the roll-out of green energy products are also seen, for example due to complicated PPA negotiations, complexities in valuation, volatile supply profiles and the low standardisation of products. According to the results assessment, green energy products therefore require specific hedging strategies and highly developed digital technologies.
• The importance of guarantees of origin is growing. Through them, a product can be demonstrably qualified as green.
  Politicians reacted quickly - probably not least for electoral reasons: In a draft bill already under discussion, the climate protection targets were immediately adjusted. However, there is still a lack of concrete means to achieve these goals.
  
  

Climate Change Act 2019

With the KSG 2019, the legislator pursued increased climate change efforts and protection against the effects of global climate change. The KSG 2019 was based, on the one hand, on the obligation under the Paris Agreement to limit the increase in the global average temperature to well below 2 °C and, if possible, to 1.5 °C above the pre-industrial level, and, on the other hand, on the commitment of the Federal Republic of Germany to pursue greenhouse gas neutrality by 2050 as a long-term goal. In order to achieve the targets, the KSG 2019 contained the obligation to reduce greenhouse gas emissions by 55% by 2030 compared to 1990 and defined the reduction paths applicable by then through sectoral annual emission levels. The law did not contain any regulation beyond 2030. In 2025, the Federal Government was to set annually decreasing emission levels for the period after 2030 by means of a legal ordinance.

Decision of the Constitutional Court

The decision of the Federal Constitutional Court declared the KSG 2019 incompatible with fundamental rights. The KSG does not take into account the dimension of intertemporal safeguarding of freedoms - i.e. that the protection of future freedoms and rights also requires that the transition to climate neutrality be initiated in good time. The legislator must therefore formulate transparent measures at an early stage so that future climate protection measures do not have to curtail freedoms far more drastically.
The national climate protection targets (Section 3 (1) and Section 4 (1) (3) KSG in conjunction with Annex 2) violate the requirement arising from the principle of proportionality that the reductions of CO2 emissions required under Article 20a of the Federal Constitution up to climate neutrality be distributed over time in a forward-looking manner that does not violate fundamental rights. In addition, the legislature had regulated the updating of the greenhouse gas reduction path in § 4 para. 6 sentence 1 KSG in a constitutionally insufficient manner, because it is not sufficient to merely oblige the Federal Government to make a further determination once - in 2025 - by means of a statutory instrument. Furthermore, the Constitutional Court established guard rails for future legislative activities by formulating benchmarks for when legislative activity would be manifestly unsuitable (a protection concept that did not pursue the goal of climate neutrality) or completely inadequate (a protection concept that allows climate change free rein and implements the fundamental right protection mandate solely through so-called adaptation measures).

Legislative activity

As a result of the decision, the political process gained new momentum and far-reaching political decisions have already been made that are to be implemented by the Bundestag before the end of this legislative period. The planned amendments to the KSG provide for a significant tightening of the CO2 emission targets. For example, the reduction target for 2030 is to increase by 10 percentage points to at least 65%, and for 2040 to at least 88%. On the one hand, the annual emission levels already set for the various sectors for the years 2023 to 2030 are to be updated in line with the climate protection targets. On the other hand, the law provides for cross-sectoral annual reduction targets along the way in the 2030s. In 2024, the annual reduction targets for the individual sectors for the years 2031 to 2040 are to be specified by the federal government in a binding legal ordinance. By 2045 - and thus five years earlier than envisaged in the KSG 2019 - it is also planned that Germany will achieve CO2 neutrality. After 2050, the federal government aims for negative emissions. At that point, Germany should therefore sequester more greenhouse gases in natural sinks than it emits. Accompanying the amendment of the KSG, the federal government has adopted a declaration on the “Climate Pact Germany”, through which numerous supporting measures are to be implemented in the various sectors.

In addition, parallel to the discussions on the amendment of the KSG, the Act on the Further Development of Greenhouse Gas Reduction Quotas has already been passed by the Bundestag. With this amendment, the growth path was redefined and the greenhouse gas reduction quota was increased from currently 6% to 25% by 2030. This is intended to give Germany a pioneering role in the use of renewable energies in the transport sector. For oil companies in particular, this increase will mean that they will now have to use more renewable energies, such as green hydrogen, renewably generated electricity or biofuels, in order to reduce the greenhouse gas emissions of their fuels in accordance with the greenhouse gas reduction quota. In addition to the use of electricity-based fuel on the basis of green hydrogen and advanced biofuels obtained from waste and residual materials, the expansion of the nationwide charging infrastructure for e-cars is to be promoted through a triple crediting within the greenhouse gas reduction quota.

Significant changes in the energy industry

The most far-reaching changes will probably take place in the energy sector, as it not only has to drive decarbonisation, but also has to cope with a significantly increased demand for electricity due to the rise of e-mobility as well as a further increase in electricity-intensive digitalisation and heat supply. Adding to this balancing act is the fact that the energy sector is expected to reduce its emissions by a further 38% from the original 175 million tonnes of CO2 to now only 108 million tonnes of CO2, and is thus expected to deliver the highest additional CO2 savings by 2030.

Expansion of renewable energies

The expansion of renewable energies is likely to play a key role in achieving these goals. This includes above all the replacement of previous fossil power plants with renewable energies. For example, to achieve the targets, new PV plants with a capacity of ten gigawatts (twice as much as recently) and wind energy plants of seven gigawatts (almost five times the pace) would have to be built every year. Although such an expansion is politically desired, the already known difficulties are likely to remain in the short term: Too little land has been designated, lengthy and complex approval procedures, slow grid expansion.

Accompanying regulatory measures are therefore necessary for the prompt achievement of faster expansion and can be expected from a future government. These include, for example, the creation of separate energy infrastructure senates at the Federal Administrative Court. An acceleration law for renewable energy plants and changes in planning law would also be welcome regulatory measures to meet the future challenges in the energy industry. Such means or expansion paths are missing in the current draft of the First KSG Amendment Act. In view of the decision of the Federal Constitutional Court, however, it is conceivable that there will be even more far-reaching relaxations in regulation and at the same time stricter requirements for projects, such as the consideration of the carbon footprint in the context of approval and the mandatory use of building materials produced in a CO2-neutral manner. In any case, the Federal Constitutional Court makes it clear that even serious restrictions of freedom for the protection of the climate can be proportionate and justified under constitutional law, and thus grants the legislator far-reaching leeway in shaping the law.

In addition to legislative activities, however, technical innovations such as floating wind turbines and the decentralisation of energy generation will also play a role in the expansion of renewable energies. In the decentralisation of energy generation, in addition to the increasing use of “classic” photovoltaic roof systems, electricity-generating building materials such as bifacial modules, e.g. as property boundaries, façade systems or PV carports, are likely to play an increasingly important role, enabling energy to be used locally. This development has already recently been reflected in state legislative activities to create an obligation to use solar modules in new buildings.

The pressure to adapt and change in the energy industry is likely to be exacerbated by the fact that, despite political declarations to the contrary, adherence to the coal compromise, which provides for the phase-out of coal by 2038, will not remain unaffected by legislative climate protection measures. A paper prepared by Prognos AG, the Öko-Institut and the Wuppertal Institute for Climate, Environment and Energy, for example, suggests that the coal phase-out should be completed as early as 2030. The share of renewable energies in electricity production would then have to be around 70%. In this context, an expansion of the Renewable Energy Sources Act 2021 could be necessary to accelerate an expansion beyond the previous target of 65 percent. This is because the primary energy of the future required for climate neutrality will no longer come from fossil fuels, but from renewable energies. This also shows the importance of the rapid creation of alternative energy sources.

Hydrogen expansion

Similarly, accelerated growth of the hydrogen economy is likely to occur by bringing forward planning for the supply and use of hydrogen in all appropriate sectors. Hydrogen is seen as the key to decarbonising various energy-intensive industries where it is impossible or difficult to reduce emissions in any other way. However, its production is associated with comparatively high costs compared to conventional energy sources and is therefore not yet competitive. Politically, a special focus is being placed on offshore hydrogen production and the infrastructure required for this. The federal government plans to invest eight billion Euros in this area over the next few years. Electrolysis capacities of 5 GW are to be created by 2030, and as much as 10 GW by 2040. The German government sees potential for CO2 savings above all in the use of electrolysis in the chemical industry. Companies are planning production plants (electrolysers) worldwide with a total capacity of 214 GW by 2040. A hydrogen strategy has also already been presented at the EU level, according to which hydrogen technologies and systems are promoted as an important European value chain within the framework of Important Projects of Common European Interest. The German legislator has already presented proposals for the development of an infrastructure for the transport of hydrogen as an interim solution until a European regulatory framework is enacted. What remains necessary, however, is the creation of regulatory framework conditions for production, transport and demand that constructively accompany the expansion and thus enable long-term investment decisions in industrial projects.

De-carbonisation in the building sector

The building sector is currently responsible for 40% of energy consumption and 36% of greenhouse gas emissions in the EU and, due to this high level of energy and emissions, will become a greater focus of reduction efforts in the future. To achieve the European emission reduction target of 55% by 2030, the EU should reduce greenhouse gas emissions from buildings by 60%, the corresponding final energy consumption by 14% and the energy consumption for heating and cooling by 18%.

This need for action is also evident at the national level. The building sector was the only sector to miss the sector-specific targets for 2020: instead of saving 40% of emissions in 2020 compared to 1990, only 35.7% were saved. This was due in particular to an increase in emissions from private households. As the Council of Experts confirmed on 15 April 2021, an emergency programme for the sector must therefore be submitted by 15 July 2021. Through this, in accordance with the KSG, an offset of the exceedance of the permissible annual emission quantity must be achieved.

Furthermore, a potential medium for future emission reduction could in principle be the Building Energy Act (GEG). However, the Act does not yet provide for stricter standards compared to its predecessor. In this respect, it is important to observe whether such requirements or more restrictive measures will be included in the next review of the applicable energy requirements for new and existing buildings, which was planned by the federal government for 2023 and has now been brought forward to the beginning of 2022.

At the European level, the so-called strategy of a “renovation wave” of the EU for the building sector, which was adopted on 14 October 2020 and includes the promotion of energy-efficient renovation of buildings in the EU, is intended to remedy the situation. Currently, only 11% of the EU’s building stock is renovated each year, and renovation work to improve energy efficiency is only a fraction of this. Thus, the weighted annual share of energy renovations is currently only about 1% of the approximately 220 million buildings on the territory of the Union. The strategy aims to at least double the rate of renovations by 2030, while increasing average energy efficiency gains. The target is to renovate 35 million buildings. This should create up to 160,000 additional “green” jobs. This is because decarbonisation in the building sector could trigger an increase in construction activity in the future. This is essential because during the COVID 19 pandemic, construction activity fell by 15.7% compared to 2019; investment in energy efficiency also fell by 12%.

According to the Federal Government’s 2022 Emergency Climate Protection Programme, future subsidies will be increasingly focused on electric heat pumps as the most important sustainable heating technology in existing buildings. According to this programme, fossil-fuel heating systems will no longer receive funding from the federal government’s support programmes from 2023 onwards.

Furthermore, climate targets are expected to influence the environmental impact assessment of new industrial and plant projects in the future. The Environmental Impact Assessment Act (UVPG) includes explicit requirements to consider a project’s vulnerability to the impacts of climate change. However, these requirements currently only have a clarifying effect. It remains to be seen how standards and concrete emission specifications for individual sectors will be incorporated into the environmental impact assessment in the future.

Conclusion

Taking into account the decision of the Federal Constitutional Court, the CO2 reduction targets have already been adjusted in a draft bill for the revision of the KSG 2019. Here, the energy industry is to achieve the largest share of the expanded CO2 reduction. So far, however, the draft lacks means to achieve the modified targets, such as measures to expand renewable energies. It remains to be seen whether the revised KSG will be enacted before the end of this legislative period.