Green tech might do more than save Germany’s environment
“So that solar and wind do not destroy our homeland” reads one of the election campaign posters of a German political party currently leading in the polls, Alternative for Germany (AfD). They are not alone in the criticism against the national strategy regarding climate action, albeit extreme. Looking at the current coalition agreement between the centre-left Social Democratic Party and the centre-right Christian Democratic Union, climate change carries less weight now than under the previous government. As seen in Graph 1, only around 10 per cent of Europeans believe that climate change is the most important issue facing their country, down from 20 per cent six years ago.
The shift away from green energy enthusiasm came in the aftermath of the COVID-19 pandemic, the overall sluggish growth of Europe, and the Russia-Ukraine war, on top of concerns for the economy, price hikes, and security becoming top of mind for Europeans. While this might raise questions about the achievability of climate goals, a look at the companies in the German green tech sector seems to indicate that they are in a comparatively healthy position and can still compete in the global race for greening the economy. One could even say that these companies could be part of the solution to revitalise German GDP, temper prices, and boost energy security.
Pressing issues
At the moment, decarbonising could help reach goals that are more in vogue than to combat climate change altogether. Take energy security as an example: Germany significantly reduced its exposure to Russian energy sources after the latter attacked Ukraine. While the band-aid solution is to source from other countries, the alternative could be found in renewable energy as a mid- to long-term fix to reduce the overreliance on external supply. The likes of China-produced solar panels may bring its own problems; however, once the production technologies for renewables are installed in Germany, the country can wean itself from relying on other countries. This would also help Germany achieve a higher degree of energy security.
Another pressing issue for many Europeans is rising prices. Since the pandemic and the Russia-Ukraine conflict, inflation has slowed and is almost back to the 2 per cent target. However, with corresponding supply-side restrictions, energy prices continue to drive headline costs up, making it a top concern for many German households and firms. After all, the country has comparatively high energy prices versus the rest of the region. Previously, renewable energy subsidies were charged to consumers’ electricity bills, a policy that was ultimately scrapped in 2022. With the combination of low-cost renewable energy production and the promise of higher efficiency, lower prices are likely in the future – in the process, Germany can hit two birds with one stone.
Finally, we should not forget the overall GDP data. Since its decline in 2023, concerns about the negative impact of climate regulation have been the centre of campaign slogans of the AfD. While limiting production of greenhouse gas emissions usually implies some deceleration in economic activity, this also generates a huge momentum in green tech sectors worldwide.
Green means grow
For Germany, the green tech sector can push the domestic economy in three ways. For the first two, the German green tech industry is both huge and fast-growing when viewed by its gross value added (GVA) and employment. By size, the whole green tech sector recorded 3.4 million employees and a GVA of EUR 314 billion (USD 363.7 billion) in 2023, equivalent to 7.5 per cent of total German employment and logging the fastest labour force expansion across sectors since 2010, as seen in Graph 2. For comparison, automobile and machine manufacturing in Germany both make up 3.1 per cent of cumulative GVA, with vehicle companies employing 1.1 million in 2023.
Regarding growth, green tech expanded by 4.7 per cent annually from 2010 to 2023, far outstripping the roughly 1 per cent growth of German GDP over the same period. Moreover, the GVA of the green tech sector is poised to double by 2045 in Germany alone. The fast-growing subsectors to look out for are sustainable mobility and renewable energy systems, while the areas of circular economy and sustainable mobility are the largest in terms of GVA and employment.
The last avenue is the potential of green tech to accelerate Germany’s otherwise meagre productivity growth. Albeit not perfect, both high start-up activity and impact patent count can be seen as leading indicators of productivity. Start-up activity has been running on high gear, with a quarter of all funding over the last five years going into sustainable start-ups. As for patents, Germany ranked third in patent activity from 2010 to 2023 for green tech, just behind the US and Japan. In particular, the top patents come from wind energy, new mobility, and efficient production, with Germany filing more than half of new patents within EU. These are also sectors wherein German companies are successfully competing internationally.
In contrast, reduced political will might lead to failure on both fronts. On one hand, achieving emission reduction targets is technically possible, but current policies are not enough: Germany needs an optimal policy mix that would include politically unpopular carbon budgets or taxes, and subsidies to encourage clean innovation. On the other hand, the green tech sector is bogged down by a mix of typical German problems like a shortage of skilled workers and a complex bureaucracy. While the country is seeking greater global supply chain participation in green tech – Germany was the second-largest exporter of green tech goods after China in 2018 – other countries, especially those in the East Asian region, are catching up.
Germany must tread this shift carefully, as butchering the transition towards a green economy in lieu of creating more jobs and growth might hinder businesses that can actually provide both.
This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.
