Germany's €38bn climate blind spot

Germany is heading for a climate miss.

The latest data from the Federal Environment Agency (UBA), reports the Handelsblatt, show national greenhouse gas emissions falling by a mere 0.1% in 2025.

This is insufficient to achieve the country's 2030 emission reduction goal, leaving Berlin at roughly 649 million tonnes of CO₂ equivalent. With a legally binding goal of a 65% cut by 2030, Germany's projected Effort Sharing shortfall comes to some 255 million tonnes. Where the carbon price finally settles, the Handelsblatt Research Institute models a range of €60 to €150 per tonne by the end of the decade, will decide the cost of that failure, which could end up close to €38 billion.

An Effort Sharing problem, not an ETS one

The penalty would not be levied under the EU Emissions Trading System, the market immediately associated with carbon pricing. It falls under the Effort Sharing Regulation (ESR), the EU mechanism that caps emissions in everything the ETS leaves out: transport, buildings, agriculture, waste and small industry. A member state that breaches its national budget under the ESR must purchase allowances from one that has come in below its own, and the market for those allowances is tightening. According to some estimates, Germany alone would require a substantial share of the available supply.

Where the emissions actually are

The culprits are two sectors: buildings and transport. By 2030 the former is set to overshoot its budget by 110 million tonnes, the latter by 187 million. In spite of their rising market share, battery-powered cars remain just 4% of vehicles on the road in Germany this year; 81% of German heating still runs on oil and gas. While renewables now cover around 55% of electricity, coal and gas still generate 38% of it, and once transport and industry are folded in, fossil fuels account for 76% of everything the country consumes. The flows are turning; the stock is not, at least not on a timescale that reaches 2030.

Brussels moves, and stops short

On 17 July the European Commission tabled the expected revision of the ETS alongside its Electrification Action Plan. The Commission presented this as a competitiveness-driven modernisation; green groups such as the EEB condemned it as a dilution of ambition. The annual reduction factor eased from 4.3% to 3.7% for 2031–2035, and to 1.7% for the five years that follow.

The EU's climate chief rejects this interpretation. In an interview with the Belgian daily De Tijd the day after the proposal, Kurt Vandenberghe called the dilution argument "fake news," insisting the reform is calibrated to the 90% cut the bloc has committed to by 2040 while turning the ETS into an "investment machine." This is the "Draghi-ising" of climate policy, decarbonisation as a driver of competitiveness, with the polluter paid to clean up.

This is a genuine structural upgrade. The revision binds the ETS more tightly to the investment decarbonisation requires, through a new Industrial Decarbonisation Bank and a €30bn ETS Investment Booster that releases funds once quality thresholds are met, with payments tied directly to verified emissions cuts.

The instrument left in the drawer

For now, however, the revision passes over ETS2, the carbon price on buildings and road transport due to take effect in 2027/2028. This is the instrument designed to help member states meet their Effort Sharing obligations.

Vandenberghe himself makes the case for it, as a price signal is needed to change the behaviour of manufacturers and consumers alike. He is careful to frame the delay not as a retreat but as a matter of phasing the effect in gently: the Commission's own impact study put the petrol impact at around ten cents, against the fifty added by the Iran war. A share of ETS2 revenue, he notes, will flow through a social climate fund to cushion vulnerable households.

Why, then, is it stalled? While he does not lay the delay at any single capital's door, the political weather is plain enough. Resistance is loudest among those who see themselves as losing.

The remainder of the picture offers little reassurance. Industrial emissions did fall by 5% year on year, but representatives of the UBA suggested that economic weakness, not industrial transformation, lies behind the figure.

Agriculture and waste are broadly on track. Germany's independent Council of Experts on Climate Change has already judged the government's plan insufficient. And the Renewable Energy Sources Act (EEG), whose current framework does not meet EU state-aid conditions, must be rewritten by January 2027, with only a departmental draft to show for it. Further delay, the industry warns, risks a "Fadenriss": a snapped thread in the energy transition.

The EU is hardening the ETS into an investment lever at the very moment it postpones ETS2, the mechanism that would bite in exactly the sectors where Germany is weakest. The tool built for the problem sits in the drawer, held there, for now, by politics.

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