Landing into the energy transition: no matter how hard?

Germany has been leading the way for the energy transition, setting a global example of how this can be done by implementing a systemic toolbox of measures leading to a progressive decarbonization of its economy. After the Paris Agreement, climate targets became stricter and if Germany is to continue leading by example, strict and quick adaptation measures in the form of regulation must be introduced.

 

This constitutes a huge risk for corporations, securities, trustees & professional financial advisors who will have to adapt quickly to comply with such requirements. This hard landing scenario which is a direct consequence of climate regulation, means that these type of economic actors are likely to face many climate-related legal risks. Especially claims and litigation due to commercial failures to respond to risks associated with climate change (claims such as failure to accurately disclose exposure and inappropriate reporting of climate-risks), will fill this category.

 

If, on the other hand the energy transition turns to be paced and progressive, one in which climate targets are unlikely met, the legal risks that companies and states are to face will be part of a soft landing scenario, which does not mean less severe, but more dilated in time. The types of claims in this case will be destined to seek compensation for damages caused by climate change as well as claims demanding stricter action. The logic behind these type of claims being, that regulation is inadequate for mandating proper action, therefore litigation is used as a driver for coercing appropriate responsiveness from emitters (whether they be states or companies).

 

An example of this type of claims can be found in a case, in which a group of Portuguese children, supported by the Global Legal Action Network (GLAN) is suing for better climate protection. They seek to bring Germany together with other 43 signatories of the European Convention of Human Rights to court, in order to demand stricter action towards climate change. This is one out of many claims of the sort, which is likely to increase, should the response to climate change remain insufficient.

 

In considering what kind of landing would be preferable, it is important to understand the interrelatedness of both types. Since a soft landing is just a buffer, and will not impede a hard landing, it will just delay it in time. Seeing that claims for more action are being demanded, these will eventually derive in stricter regulation for all economic sectors. This is why the clear message is that adaptation is not optional, what might be optional at this point is when and how it takes place.

 

Seeing that Germany is very unlikely to reach its climate goals by 2020 [1], one could be tempted to claim that a soft landing is ahead. But considering that Chancellor Merkel claims to be determined to do what it takes to reach the 2020 targets [2], (for which 90 million tons of CO2 savings would have to be made compulsory in the next three years), would place us in front of an extra hard landing scenario.

 

What kind of landing will Germany’s economy be faced with might become clearer once the new government is elected. Currently, two coalition options are on the table; with the Jamaica (CDU/CSU, the Green Party and the FDP) coalition gaining force against the traditional grand coalition (CDU/CSU and SPD).

 

Following are some of the proposed measures in regards to climate and energy policy, by the parties, which will form Germany’s next government:


Measures

Coal Exit

 

Energy Transition Funding

 

 

Climate protection

 

 

 

European Emissions Trading System (ETS)

 

 

 

 

Resulting ET Scenario: Determined by the coalition who forms the next government. In any case, a slow and dilated energy transition is expected.

CDU/SPD

Long Term Exit/ Gradual reduction of coal power.

 

Discrete support, examination of option.

 

 

Remain with current Climate Action Plan (CAP) vs. Introduce national climate law and step up CAP ambitions, achieve 2020 targets.

 

Reform ETS to fulfill its climate protection role, avoid “carbon leakage”.

 

 

 

Characterized by a soft landing in which regulation will progressively get stricter in attempt to respond to increased climate damages. A certain reluctance for strong action will initially characterize this government and from one moment to the other, their response to compensate for initial weakness is likely to end in extreme measures.

Jamaica Coalition

Contrasting positions ranging from no exit at all vs. irreversible coal exit.

Introduction of CO2 floor price, abolish power tax, reduction of rebates vs. stop all renewable subsidies end EEG.

Introduce climate law with BINDING goals, introduce honest CO2 price vs. no long-term targets per sector, global carbon price.

 

Increase CO2 price by deleting excess ETS certificates and end free allocation, make PA emission reductions binding across de EU vs. no CO2 floor price, bring transport and construction into the ETS system.

Characterized by a soft landing and by a lot of rhetoric, opposing views and discourse, inadequate and insufficient climate regulation is expected. The amount of time spent in discussions will take away valuable time for action. Which makes this option an even less adequate one for appropriately responding to climate.



If the grand coalition results in the next Government, negotiations for ending coal will be lengthy, which means that no strict requirements for the uptake of renewable energy will be mandatory, causing aggregate number of emissions to be released. Thus increasing the likelihood of climate disasters. This leaves companies defenseless against claims demanding increased action. Which we could find an example in the case of the Peruvian Farmer suing RWE, claiming that the utility company is responsible for the damages that climate change is to have on his property.

 

In this context, support for transitioning to renewable energy would also be discrete, thus insufficient for reaching considerable emission reductions, which would again leave the door open for claims against companies who might be demanded to do more to adapt to climate change, but due to insufficient government guidance will lack the means for doing so.

 

In regards to climate protection, the envisioned pathway is still up to debate, with a higher likelihood of climate policy continuing its course, thus being insufficient to respond to the financial and physical challenges brought upon by climate change.

 

If history repeats itself, which in many cases it unfortunately does, should the grand coalition win, this government is likely to be characterized by insufficient initial action, and then in an attempt to compensate, once the consequences of a soft landing hard to emerge, an increased speed and strictness for response will take place. We could see this happening in the exact way as with the 2020 targets. If Chancelor Merkel ́s declaration is something more than mere words, the only way in which the targets might be reached, is if they are accompanied by strict measures.

 

If on the other hand, the Jamaica coalition would be the one to form the new government the situation might look even grimmer. The Green Party is determined to exit coal and shut the dirtiest coal plants immediately. For which it will find strong opposing arguments, such as a “long term coal exit” and the notion that “coal is indispensable for the foreseeable future”. Seeing that the CDU and FDP position towards climate (in)action is closer to each other, it will be hard for the Green Party to have its way.

 

The same situation can be noted in regards to other climate and energy measures within the Jamaica coalition. Lots of rhetoric is expected, claims that market mechanisms will be the answer to all questions that really require firm political stances are likely to deter action. Numerically, postures aiming at negating the need for proper action (CDU and FDP) thus slowing down the energy transition, are likely to determine the government represented by the Jamaican Coalition.

 

It seems that no matter which coalition forms the next German government, response to climate action will fall short from what is required for decarbonizing the German economy at the necessary speed and therefore the State as well as the economy will be left exposed to an increasing amount of climate-related legal risks. These will initially be shaped by a soft landing scenario, in which allocations of responsibility for the damages of climate change will be the rule; and will very quickly flip into a hard landing scenario in which claims and litigation due to commercial failures to respond to risks associated with climate change will be filling up in courts.

 

[1] According to internal calculations of the Federal Environmental Ministry, the gap to the goal is much larger than expected: without further action, emission reductions will amount to 31.7-32.5 % by 2020, when the established commitment was to reach a reduction of 40% by then. Source: http://www.sueddeutsche.de/wirtschaft/klimawandel-deutschland-hinkt-seinem-klimaziel-hinterher-1.3702329

[2] https://www.cleanenergywire.org/news/merkel-calls-zero-emission-mobility-vw-proposes-battery-alliance/merkel-2020-climate-target-im-working-making-it-happen

Marcela Scarpellini studied law at the Universidad Católica Andrés Bello in Caracas (Venezuela) and studied with an LL.M. at the University of Stockholm (Sweden) in the field of environmental law. Marcela is in charge of the legal aspects regarding 2 °C-compatibility within right.

 

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