Economic policy for climate neutrality and digitalization

The EU has set itself the goal of becoming climate-neutral by 2050. The automotive industry has taken on this challenge and is unreservedly committed to this aim. At the same time, it is also currently in the midst of digital transformation. To meet this dual challenge, politics must also play its part. Irrespective of this, Germany must remain competitive as an industrial location – all the more so as it has fallen behind in recent years in terms of key location factors.

This double transformation is a tour de force that will require unprecedented levels of investment from companies in the coming years and decades. For the transformation to succeed and jobs to be secured, policymakers must set the right conditions. It is a matter of creating incentives for investments in innovation as well as creating a charging and refueling infrastructure. In addition, policymakers must aim to minimize the economic costs of achieving climate neutrality.

Regardless of the transformation, it should also be the goal of every government to remain ahead in the international competition between locations so that manufacturing, employment, and prosperity emerge in this country and not elsewhere. In this respect, Germany has noticeably lost ground in various location factors in recent years and urgently needs to make improvements – especially in terms of corporate taxes, energy costs, and the digital infrastructure.

The dual transformation demands unprecedented levels of investment from the automotive industry – in research and development, in the conversion of manufacturing processes, and the development of production capacities for new products such as battery cells, hydrogen or e-fuels, as well as in the training and further education of their employees and the development of a nationwide infrastructure for charging and refueling. Policymakers at EU and national level are also called upon to make their contribution here if the transformation is to succeed and manufacturing and employment are to be secured.

This includes needs-based support for investments in the industrial sector, but also a review of state aid law to determine whether it permits such support at all. In addition, the transformation requires research and pilot projects on a large scale. To this end, cooperation or even mergers between companies are likely to become more important and more frequent than they are today. In this respect, competition law must also be examined to determine whether such cooperation is legally possible.

In any case, industrial policy should always be open to technology. It is fatal for the economy if policymakers try to decide which technology will ultimately prevail by means of targeted regulatory requirements or discretionary investment policies. The winning technology – the battery-electric drive, the hydrogen drive, the ICE powered by CO₂-free e-fuels, or a mix of all these technologies – will in the long run be decided in the competition between these technologies on the market or by the consumer. By specifying technologies, policymakers are narrowing the range of possible technological developments and depriving consumers of their freedom of choice and the right to make the final decision.

Last but not least, industrial policy should aim to minimize the costs to the industrial sector of achieving climate neutrality. However, this would require integrating the transportation sector into the EU emissions trading system. This ensures that the necessary CO₂ reductions result from those emitters that can achieve them most easily and therefore cost the least. In contrast, emissions from cars are still regulated by limit values. However, as is the case everywhere in business and technology, the principle of increasing marginal costs also applies to CO₂ savings – the more that has already been achieved, the more difficult each further saving is and the more it costs. Since significant CO₂ savings per vehicle have already been achieved in automotive development, the costs of any further CO₂ prevention here are much greater than in overall industrial production.

Regardless of the transformation, it should also be the goal of every government to remain ahead in the international competition between locations so that manufacturing, employment, and prosperity emerge in this country and not elsewhere. It is the massive surge in investment required by the global transformation that makes the question of Germany's attractiveness as a manufacturing location more pressing than ever. Unfortunately, it must be stated that Germany has lost ground in various location factors in recent years, foremost the corporate tax system, energy costs, and the digital infrastructure.

• Germany urgently needs a structural modernization of corporate tax law and an adjustment of the corporate tax burden to an internationally competitive level.

• It is to be welcomed that the German government decided to introduce tax incentives for research at the beginning of 2020. However, capping the amount of funding at one million euros per company is not sufficient to send out a strong signal to the international competition. This is particularly true for those large companies that can be very flexible in their choice of research location.

• High electricity prices are also a burden in competing internationally. Of all 27 EU countries, Germany has the highest industrial electricity prices – simply because of the high taxes and levies, and the final phase-out of nuclear energy in 2022, as well as the imminent start of the phase-out of lignite-based power generation will raise the price of electricity even further.
• Finally, Germany also needs to improve its digital infrastructure: Here we rank far behind in international comparison. This is hindering the use of Industry 4.0 and hampering innovations for connected and automated driving.