The Cost of Climate Inaction

Leading Europe, Germany is poised for early benefits from a transition to net-zero

Germany has taken early action on climate and set a course to reach net-zero by 2050, in line with a 1.5°C global temperature increase target. From the late 2030s in particular and starting in 2038 -  the estimated turning point for Germany - modelling shows that the country would benefit economically from being one of the early adopters of decarbonization, and especially from being a leader in clean energy production. Building on this head start, Germany’s business sector is poised to take a strong role in sectors and industries that could shape the future of Europe’s global competitive advantage. By 2070, Germany’s net benefit will have grown to 2.5% of GDP, or €140 billion, with nearly 830,000 additional jobs mainly in clean energy and service sectors, as compared to the baseline scenario of climate inaction. By 2040, the economy would see a net benefit of 0.2% of GDP, and by 2050 be influenced by decreasing cost curves for net-zero technologies, as well as rapid deployment and scaling in all sectors of the economy.

Transformations are always complex, but Germany can achieve new growth as it accelerates to net-zero

By taking decisive action now towards limiting global warming to 1.5°C, Germany will have to undergo an unprecedented transformation of its economy in the coming years. Early investment in the net-zero pathway will cost on average 0.5 % of the national GDP each year until the turning point in 2038 when the investment starts to yield an annual economic dividend based on the Turning Point models. The decade ahead will be shaped by building the foundation for a low-carbon economy, especially a carbon-free electricity supply (mainly wind and solar), and increased use of green hydrogen, notably for industrial applications. It will be important to ensure that emissions are reduced early on to minimize the cumulative effect on global climate. Likely action would include broader mandates for Germany under the EU Emissions Trading Scheme and rising carbon prices to drive innovation, investment in R&D, and deployment of mature clean energy technologies.

By the 2030s, these trends will mature and show differences in the transformation’s rate of progress in various sectors and regions. The automotive industry will continue to phase out combustion engine production, and Germany will start benefiting from export-led growth in decarbonised, high-value manufacturing. Some regions and industries will see substantial structural adjustments but overall, these will be offset by new jobs and opportunities created in the new net-zero economy. By 2050, hydrogen in particular will be playing an increasingly important role in the decarbonisation of industry and transport, and negative emissions solutions will be deployed to address remaining emissions.

The economic cost of climate inaction is expensive and not just “business as usual”

Key to the Turning Point analysis is accounting for the cost of climate inaction. This is the starting point for a better global discussion on climate change. As described above, the analysis is based on a scenario where temperature would rise by 3°C by the end of the century. In such a world, Germany’s economy would suffer climate-change induced losses of €730 billion between now and 2070, and 470,000 fewer jobs by 2070, as compared to a world without climate damage. Corporate decision making rarely considers the economic damages implicit in this scenario of inaction on climate change.

Shaping Germany’s net-zero turning point

The Turning Point reports seek to contribute to a better global conversation on climate inaction and highlight the long-term benefits of early action. Acting early to develop clean energy, electric vehicles, and hydrogen pays off, but these efforts must be scaled up in a strategic approach for the entire economy. Solutions must be devised to address disparities, by sector or region, and the impact of the transition. It is furthermore difficult to see how private investors are to finance the path to the turning point without substantial support from the public sector.

Germany has taken early action in particular on the clean electricity supply that forms much of the initial backbone of emission reduction and continues to make progress towards its intermediary emission-reduction targets (helped by lower emission during the pandemic). The path forward to decarbonize Europe’s largest economy is based on substantially more clean energy, like green hydrogen as the key driver of decarbonization. The Turning Point analysis highlights that a coordinated approach along two dimensions is required to ensure alignment of trade and foreign policy with climate diplomacy. When it comes to focusing on a joint approach to the transition, Europe has vast potential with its large number of member countries, population and economy. Only together can the world manage a transition to net-zero and reap the benefits of a 1.5°C world.