Germany's Budget Cuts Leave Heavy Industry Stuck with Dirty Tech

Mint

3 days ago

(Bloomberg) -- In Geseke, a small town in Germany's western industrial heartland, plans to launch a large-scale carbon capture project at a local cement plant have been put on ice.
Operator Heidelberg Materials AG had received European Union subsidies for the green project that's set to save 700,000 tons of carbon emissions annually, and planned to start construction next year. But the company — which last month started capturing and liquefying emissions in Norway — is no longer staking out a timeline for its German project because the conditions for a prompt, final investment decision aren't given.
Germany's new conservative-led government has thrown its weight behind carbon capture and storage, touting it as a pragmatic path to meeting legally-binding climate goals in sectors that are hard to decarbonize. But while Chancellor Friedrich Merz has pledged to fast-track the technology by lifting regulatory barriers, the government's sweeping budget cuts are undercutting the very projects it says it supports. The result is a climate strategy caught between political convenience and fiscal restraint — leaving the country's most emissions-intensive industries facing a rising cost of carbon emissions in the coming years with German industry already struggling to stay in business.
Berlin recently revived a draft proposal that was left unfinished by the previous government to legalize CCS. Yet funds for a clean industry program — which was developed to support everything from hydrogen to carbon capture — are set to be slashed to €1.8 billion ($2.1 billion) from €24.5 billion in the mid-term, according to this year's draft budget law that's currently being discussed in parliament.
While the ruling coalition has promised to stick to the nation's 2045 climate neutrality goal, it's becoming increasingly unclear who will foot the bill. 'If the government deprioritizes funding for the decarbonization of industry, this would be by far the most problematic measure in terms of climate protection,' said Jens Burchardt, co-founder of Boston Consulting Group's Center for Climate and Sustainability.
The nation's manufacturers are already struggling with layers of red tape, high energy prices and a shortage of skilled staff. They will come under additional pressure in the coming years as costs for polluting the environment increase. 'Against this backdrop, withdrawing the financial support companies need to invest in green alternatives at the same time is a recipe for the further deindustrialization of Germany,' said Burchardt.
Swiss building materials specialist Holcim AG, which plans a carbon capture project near Hanover, said the budget cuts have led to uncertainty throughout the industry as to how decarbonization funding will continue overall. A representative for industry group Carbon Management Alliance said the cuts are a setback for climate targets.
The government's key program to help clean up its heavy industries relies on an auction instrument to bridge the pricing difference between conventional processes and cleaner, more expensive alternatives. While a first auction last October awarded contracts to 15 projects, an economy ministry spokesperson said preparations for a potential second round were 'complex,' though it's technically possible for another to take place this year.
One company that could be eligible to participate is Hamburg-based copper recycler Aurubis AG. It installed two hydrogen-ready anode furnaces last year, but with no hydrogen available at competitive prices, it continues to burn natural gas in its state-of-the-art ovens.
At an energy conference last month, economy minister Katherina Reiche explained that the expected demand for hydrogen isn't materializing, or is very delayed. Meanwhile, the German budget envisions slashing two-thirds of the funding the previous administration allocated to hydrogen.
Of course, the lack of state support isn't the only reason why decarbonization projects are stuck or failing. For example, when steelmaker ArcelorMittal SA last month announced it would hand back a €1.3 billion subsidy for two local green steel units, it pointed to 'unprecedented' market pressure, weak demand, unfavorable European policy and high electricity prices.
That's an even bigger problem for the chemical industry in Germany which is facing factory closures, layoffs and production cuts. 'I can only spend every euro once,' said Martin Naundorf from Infraleuna GmbH, operator of a chemical hub in the country's east. Given the current conditions, 'nobody can afford to invest in technologies where it's unclear when they'll become profitable.'
However, the state could also change its procurement strategy to help climate technologies reach market maturity, a measure the coalition already agreed upon.
Steelmaker Stahl-Holding-Saar GmbH is one company that would benefit from that approach. It says it's the only European rolling mill to offer CO2-reduced rails, for which the steel was produced with electricity instead of coal. The firm already concluded supply contracts with France's SNCF Réseau, Belgium's Infrabel and Swiss Railways, but hasn't received interest from any Germany customer, according to Chief Transformation Officer Jonathan Weber.
Major industrial competitors, such as China, are investing massively in new technologies to help manufacturers decarbonize, said Julia Metz, director of think tank Agora Industry. 'If Germany wants to keep up, it must not miss the boat and must invest massive amounts of money in new climate protection technologies.'
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