The current administration has made the preservation of the internal combustion engine (ICE) a key aspect of its re-industrialization policy, illustrating a direct conflict between the immediate need for economic stability and the European Union’s long-term climate objectives.

Germany experienced a significant policy shift in 2025 when Chancellor Friedrich Merz (CDU) took office. The nation is grappling with an increasing tension between climate ambitions and the need for economic recovery.

Policy and Cost Conflicts

The Merz government has shifted its approach from viewing climate action solely as a moral obligation to adopting what it calls “climate pragmatism.” In this framework, climate mitigation is primarily seen as a means to bolster industrial competitiveness. 

Despite a recent constitutional reform that established a €500 billion special fund for infrastructure and climate initiatives, the government remains committed to upholding the so-called “debt brake”, a fiscal rule that limits government spending to ensure budgetary discipline. This fiscal restraint is evident in the ongoing conflict between the need for high CO₂ prices — set to rise to €55 per tonne in 2025 to promote decarbonization — and the government’s aim to reduce electricity taxes and grid fees to support businesses.

Economic Development Priorities and Policies

With a clear focus on “re-industrialization,” the Merz administration aims to revitalize an economy projected to grow at a modest 0.1% to 0.3% in 2025. Central to this strategy is the creation of a €500 billion special fund intended to bridge the gap between the fiscal discipline imposed by the debt brake and the urgent need for modernization. This fund aims to address the significant investment backlog in rail networks and digital infrastructure, which is crucial for boosting long-term GDP growth. Importantly, it also allocates €100 billion for the Climate and Transformation Fund (KTF), which is designed to support industrial decarbonization efforts.

However, there is a concern that this approach could lead to the siloing of funds, risking neglect of broader climate initiatives in favor of more high-profile infrastructure projects. Furthermore, the current administration has made the preservation of the internal combustion engine (ICE) a key aspect of its re-industrialization policy, illustrating a direct conflict between the immediate need for economic stability and the European Union’s long-term climate objectives.

In addition to these initiatives, the government has ambitious plans to increase research and development spending to 3.5% of GDP by 2030, with a specific focus on groundbreaking areas such as artificial intelligence, hydrogen networks, and advanced nuclear research. This strategic investment in innovation seeks to position Germany at the forefront of emerging technologies while simultaneously addressing pressing climate challenges.

Impact on Climate Mitigation Goals

Despite these efforts, the government’s economic priorities are hindering progress on crucial climate initiatives. While it formally upholds the goal of achieving climate neutrality by 2045, current projections suggest a significant risk of missing the 2030 target of a 65% reduction in emissions. The administration’s focus on immediate industrial relief has taken precedence over long-term climate objectives.

Additionally, funding allocations for international climate finance are under threat. Although Germany met its €6 billion pledge in 2024, proposed budget cuts for 2026 could jeopardize future commitments to climate initiatives both domestically and abroad.

Bridging the Barriers: Concrete Examples

To address these conflicting priorities, the government is pursuing policies that aim to advance both economic growth and environmental goals. One example is the fast-tracking of legislation for Carbon Capture and Storage (CCS) in industrial processes and gas-fired power plants. This initiative allows heavy industries to continue operating while reducing their emissions.

Another major project is the Hydrogen Core Network, which aims to decarbonize the steel and chemical sectors while establishing a new “green” industrial infrastructure by 2032. 

Additionally, the government is working to reduce bureaucratic hurdles by creating a “start-up protection zone” and implementing “simplification laws” to speed up the approval process for renewable energy and grid projects, which have been mired in lengthy delays.

This Post was submitted by Climate Scorecard Germany Country Manager, Monique de Ritter.

Engagement Resources

1. Economic Forecasts: European Commission (2025): Economic forecast for Germany – Economy and Finance – European Commission / ifo Economic Forecast Spring 2025: German Economy Treading Water
2. High-Tech Strategy Report: German Federal Government: The High-Tech Strategy 2025 Progress Report 
3. Climate Policy Reports: CleanEconomyBridge (2025): Merz’s Cabinet: Implications for the Clean Economy Transition / Germany’s 2025 Coalition Agreement: What’s Ahead for Energy and Climate Policy? – Lexology
4. Combustion Engine Ban: Germany’s Merz urges EU to ease 2035 combustion engine ban | Reuters