COP26 is over: what does the outcome mean for business in Germany?

COP26 has come to an end on Saturday 13 November 2021 with a final agreement known as the “Glasgow Climate Pact” after two weeks of negotiations and several additional statements by different groups of countries. For a general view on the outcome of COP26, see our blog post: COP26: what was decided?  What are the implications for business in Germany?

Affirmation of 1.5°C target, death knell for coal?

While the Paris Agreement obliges the parties to hold the global temperature increase to “well below 2°C” above pre-industrial levels and to (additionally) pursue “efforts to limit the temperature increase to 1.5°C”, in the Glasgow Climate Pact the parties now explicitly shift the focus to the 1.5°C path. It is also recognised that to this aim, it is required to reduce global CO2 emissions by 45% relative to the 2010 level and to net zero around mid-century. Although the climate pledges by all the COP26 parties currently in place will likely not be sufficient to achieve this target (see our blog post), it at least affirms that all parties acknowledge that global warming should in principle be limited to 1.5°C.

Furthermore, all countries agreed to revisit and strengthen their current 2030 emissions targets (so-called Nationally Determined Contributions – NDCs) in 2022, which is earlier than generally required under the Paris Agreement (2025).

The parties are also called upon to accelerate efforts towards the “phasedown” of unabated coal power and “phase-out” of inefficient fossil fuel subsidies, which is the first time that fossil fuels are officially addressed in a COP agreement (although somewhat watered down compared to the initial draft, see our blog post).

Which additional statements did Germany sign?

During COP26, several additional statements were signed by different groups of countries on further issues, going beyond what is included in the Glasgow Climate Pact. Germany signed most, but not all of these statements. In particular, in addition to the Global Methane Pledge (see our blog post), Germany joined the Global Coal to Clean Power Transition Statement (so-called Coal Pledge), recognising that coal power generation is the single biggest cause of global temperature increases and committing to achieve a transition away from unabated coal power generation in the 2030s (or as soon as possible thereafter) for major economies and in the 2040s (or as soon as possible thereafter) globally, and the Statement on International Public Support for the Clean Energy Transition, pledging to principally end new direct public support for the international unabated fossil fuel energy sector by the end of 2022.

In contrast, along with the U.S., China and the manufacturers Volkswagen and BMW, Germany abstained from signing the COP26 Declaration on Accelerating the Transition to 100% Zero Emission Cars and Vans, in which around 30 countries as well as cities and car manufacturers (including e.g. Mercedes-Benz, Ford and General Motors) announced to work towards all sales of new cars and vans being zero emission globally by 2040, and by no later than 2035 in leading markets. German officials indicated that this was because e-fuels made from renewable energies were not considered zero emission in the declaration.

Do the German national climate targets need to be revised?

Following a landmark decision by the German Federal Constitutional Court (see our blog post), the German national climate targets have recently been increased to a reduction of at least 65% until 2030 and of 88% until 2040 compared to 1990. Net climate neutrality shall be achieved until 2045. On an EU level, the European Climate Law, which entered into force in June 2021, sets a reduction of net greenhouse gas emissions within the EU by at least 55% compared to 1990 levels by 2030 as intermediate Union climate target. Union-wide emissions reduction to net zero shall be achieved by 2050 at the latest.

The current NDC of the EU and its Member States in accordance with the Paris Agreement was submitted in December 2020 and already provides for a net domestic reduction of at least 55% by 2030 compared to 1990 (see here).

Against this background, it is not expected that Germany or the EU will further increase their respective climate targets as a reaction to the Glasgow Climate Pact. The German Ministry of Environment emphasised that the EU already significantly increased its climate target for 2030 (see here), and European Commission President Ursula von der Leyen stated that everyone has to take their responsibility, referencing the current Union climate targets as the EU’s share (see here).

How shall the German national targets be reached?

Beyond the climate targets as such, the main question for business in Germany is how these targets shall ultimately be reached. Regarding the EU level, the Commission presented its “Fit for 55” package in July 2021, consisting of various legislative and policy proposals in view of the 55% reduction target until 2030, including a revision of the existing EU ETS towards a steeper reduction, the introduction of a new emissions trading system for emissions from fuels used in road transport and buildings (not unlike the recently introduced German fuel emissions trading), a carbon border adjustment mechanism (CBAM) to prevent carbon leakage, as well as tightened CO2 standards for cars and vans which would effectively result in a phase-out of combustion engines in the EU by 2035 (see our "Fit for 55" microsite). The package has entered the legislative process and will presumably be subject to extensive debate by Member States and the European Parliament.

In Germany, the definition of further specific measures to achieve the national and European climate targets will mainly be a task for the new government which is currently in the making. The coalition talks between the Social Democrats, the Green Party and the Free Democrats are ongoing and have entered high-level negotiations after a phase of more granular discussions in working groups. The parties re-affirmed on 16 November 2021 that the coalition agreement shall be finalised within the following week and that the new government shall be instated in the second week of December.

The negotiations are strictly confidential and, unlike earlier coalition talks, there were basically no leaks. However, in in a preliminary discussion paper issued in mid-October 2021, the parties confirmed the 1.5°C path and pledged to expedite an immediate action programme (“Sofortprogramm”) in 2022 with all necessary laws, regulations and measures, including the drastic acceleration of the development of renewable energies. The German coal exit, currently planned for 2038 after lengthy negotiations, shall take place “ideally already until 2030”. The parties also explicitly endorsed European Commission’s proposals in connection with the Fit for 55 package and announced to shape the instruments in the individual sectors as open to all types of technology as possible, which is stated to include only CO2 neutral vehicles being approved in Europe by 2035. The concrete details remain to be seen when the coalition agreement will be published. However, the statements during COP26 may indicate that the coal exit could indeed be preponed from 2038.

Furthermore, it is to be expected that in practice in particular German development institutions and public guarantors will need to consider the German pledge to end new direct public support for the international unabated fossil fuel energy sector. This would principally require regulatory guidelines by the new government in view of excluding new financing for fossil fuel projects and shifting support towards projects that are compliant with the 1.5°C path.

What do German stakeholders think?

Representatives of German industry, in particular the president of the Federation of German Industry (Bundesverband der Deutschen Industrie – BDI), rated the outcome of COP26 as insufficient, considering stronger international cooperation and binding climate protection targets for virtually all countries to be indispensable, as existing or even increasing differences in the ambitions will relocate emissions to countries with less stringent climate protection measures. The CBAM, which is part of the European Commission’s Fit for 55 proposals, might generally ease such carbon leakage risks, but will – if adopted – only apply from 2026.

Environmental and climate protection associations also generally deem the results of COP26 as not far-reaching enough. Greenpeace and Germanwatch both see an obligation for the future coalition in Germany to take immediate measures, with Greenpeace deeming it mandatory to implement the coal exit by 2030, stating that from now on, German tax money must not be used for coal, oil and gas.

Does the litigation risk for companies increase?

Following the climate decision by the German Federal Constitutional Court and building up on the court’s considerations as well as the ruling by the district court of The Hague against Royal Dutch Shell in May 2021 (see our blog post), members of Greenpeace and Deutsche Umwelthilfe recently filed lawsuits against the car manufacturers Volkswagen, Mercedes-Benz and BMW as well as the oil and gas corporate Wintershall Dea, aiming at obliging these companies to abstain from placing vehicles with a combustion engine on the market after 2029/2030 or, in the case of Wintershall Dea, from developing new oil or gas fields after 2025. In all cases, the claimants largely argue that the respective defendant’s business activities irreversibly reduce the global carbon budget and would, therefore, ultimately result in severe future restraints for the claimants’ fundamental rights once the budget is used up and the German legislator would be required to impose an “emergency stop” to all CO2 emitting behaviour (as indicated by the Federal Constitutional Court).

In view of the Glasgow Climate Pact, the claimants and potentially other NGOs might try to argue that the re-affirmed emphasis on the 1.5°C target shows a global consensus leading to an even smaller budget than assumed by the Federal Constitutional Court, which had based its considerations on a targeted temperature increase of 1.75°C. Generally, the climate litigation trend against companies is likely to continue both within Germany and globally, so that companies should be prepared of being targeted, and should have strategies to mitigate such risks (in particular regarding their climate protections plans).

In addition, under the German Climate Protection Act, all public authorities are obliged to take the national climate targets into account in their decisions whenever they have a margin of discretion executing federal law. While the details of this obligation are still under legal debate, NGOs have identified it as a gateway to request a comprehensive “climate impact assessment”. With the increased weight of the goals of the Paris Agreement after the decision by the Federal Constitutional Court and now the emphasis on the 1.5°C target in the Glasgow Climate Pact, it can be expected that decisions by public authorities such as permits for projects with a relevance for carbon emissions will be increasingly put under scrutiny by NGOs.

All in all, while the outcome of COP26 did not supply entirely new levers for climate litigation against companies, it does provide facets to further elaborate or reinforce existing argumentation. Whether such argumentation will be successful, remains to be seen.