German support for gas investments abroad is mostly not compatible with the Paris Agreement

Since 2015, Germanwatch and NewClimate have collaborated in developing criteria to assess the compatibility of investments with global climate goals. This blog summarises some of our ideas and explains to what extent support for fossil fuels abroad jeopardises Germany's climate commitments and the Paris Agreement.

In the wake of the Russian invasion in Ukraine and the resulting energy crisis, in June 2022, G7 leaders debated short-term energy security measures at the G7 summit in Elmau. Their communique reaffirmed their commitment to the Paris climate goals. However, they also agreed that: “In these exceptional circumstances, publicly supported investment in the gas sector can be appropriate as a temporary response, subject to clearly defined national circumstances, and if implemented in a manner consistent with our climate objectives and without creating lock-in effects.”

The G7 decision implies a potential expansion of the exemptions found in the Glasgow Statement on International Public Support for the Clean Energy Transition in November 2021. In this statement, signatories committed to end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except for limited and clearly defined circumstances that are consistent with limiting global warming to 1.5°C and the goals of the Paris Agreement. Exceptions in the Glasgow statement, however, primarily focused on concerns that the goal of universal energy access for certain countries in the Global South could not be achieved in the short to medium term by renewable energies alone.

The G7’s "expansion" of these exceptions, which can be justified by energy needs of the G7 countries, raised concerns that Germany, the G7, and the EU would abandon or at least postpone the energy transition and their climate goals. Especially in Germany, these concerns were amplified by the debate on prolonging the use of nuclear power, reverting to coal-fired power plants that had been placed in reserve, and Chancellor Scholz’s statements on his intention to support the development of new gas fields in Senegal.

For any future investments in fossil energy projects abroad, Germany as per the G7 decision now needs to demonstrate that it will still comply with its national and EU-wide climate commitments and the 1.5°C Paris Agreement limit. Considering its wealth, know-how, and historical emissions, Germany bears a particular responsibility to support developing countries to move towards 1.5°C compatible pathways and achieve the sustainable development goals at the same time.

For more detailed suggestions for each assessment step and criteria, please click here (in German, English translation following soon)

Germany’s direct or indirect support (e.g. via policy-based operations or financial intermediaries) of the following activities related to natural gas abroad are fundamentally incompatible with the Paris Agreement:

• Expansion of natural gas production, e.g. exploration or development of new gas fields
• New infrastructure for further processing or transportation of natural gas, e.g., new gas pipelines, LNG export terminals
• Activities that increase the demand for natural gas (especially considering that renewable power generation has largely achieved cost parity), e.g., new gas-fired power plants that are not primarily used to meet peak load and stabilise grid frequency, or gas for cooking and heating when renewables combined with electrification would be an alternative

The United Kingdom has developed a list of exceptions that also shows how limited the options for financing natural gas are at an international level.

To assess compatibility with national climate targets and the Paris Agreement, Germany should consider the following:

1. The declining demand for natural gas under Germany's climate targets

Compared with 2020, German imports of natural gas will have to decrease significantly by 2030 to meet German climate commitments (consumption levels to decrease by at least 10% by 2030 compared with today). Various studies suggest that electrification, and if not possible then green hydrogen, should replace natural gas in the German energy mix to meet the German commitment of climate neutrality by 2045. Electrification will lead to a more efficient system and thus an overall decline in energy demand, and significantly less hydrogen will be needed compared to current natural gas use.

Under these pathways, today's existing import capacities will be able to meet Germany's natural gas demand shortly after 2030. Additional gas purchases are therefore only temporarily necessary to compensate the loss of imports from Russia.

Measures that contribute both to today’s energy security and to reaching or even exceeding Germany’s climate goals must be prioritised if we do not want to jeopardise climate neutrality by 2045 or a cost-efficient pathway towards it. Among these measures are the massive expansion of renewable energy and electrification, investments in rail infrastructure and public transport, a focus on energy efficiency, the restructuring of the industry toward zero-emission technologies, and an agricultural transition toward a higher share of plant-based foods.

By contrast, measures that undermine the long-term goals or put them at risk must be avoided. For example, an oversupply of natural gas could slow down the expansion of renewable energy and energy efficiency efforts, as there would not be a clear price signal for measures in this area. When expanding import capacity, it is essential to keep in mind the limited time horizon for gas use. In other words, any additional capacity must either be retired soon after it is built, or it must replace other capacity resulting in an overall reduction in capacity. Therefore, it is imperative large long-term supply contracts are be avoided. In individual cases, changing the use of infrastructure for the transport of hydrogen may be a possibility. However, the technical and economic feasibility is challenging and must be critically assessed in each case and justified in the context of a future reduction of demand.

2. Limiting production of natural gas below 1.5°C in a global context

Not only in Germany, but also globally, gas use needs to decline over the next decades: According to the IPCC, global CO2 emissions must fall to net zero by 2050 to limit temperature rise to 1.5°C. This means that natural gas must exit the power supply by 2040 at the latest. Furthermore, the overall global consumption of natural gas will have to decrease significantly, that is, to less than half of current consumption by 2050. The International Energy Agency (IEA) concludes that investments in new fossil fuel energy infrastructure are not needed. This means that any investments in natural gas production will either jeopardise the 1.5°C limit or become a stranded asset.

There are few studies that model a 1.5°C compatible energy sector at the regional or national level. For Africa, for example, we are currently not aware of any reports consistent with 1.5°C pathways. The IEA Africa Energy Outlook of 2022, which includes a "Sustainable Africa Scenario," reflects sustainable development goals as well as national climate targets. However, in sum, the national climate targets overshoot the temperature limit.

All countries must massively expand renewables instead of fossil fuels. In particular in developing countries, these have further advantages than just a sustainable and secure energy supply, especially for the local population. The extraction of fossils, on the other hand, is often carried out by foreign companies with profits flowing out of the country rather than benefitting the local population.

Each country must decide for themselves on the use and sale of its own fossil resources. However, using German climate finance, development cooperation, and taxpayers' money for fossil purposes is a clear contradiction of the Paris Agreement. To make climate finance and other types of development cooperation truly effective and transformative, Germany should focus on renewable energy and on supporting infrastructure and policy mechanisms in the energy sector. Other countries will be looking at how Germany reacts to the energy crisis and thus, the German government should be aware of the precedent it sets and the potential of replication.