Merz government's first 100 days clouded by lingering energy transition uncertainty
Hopes were running high in Germany and among its allies in early May 2025 as months of political uncertainty ended after the collapse of the previous government and the new coalition of chancellor Friedrich Merz’s conservative CDU/CSU alliance and the Social Democrats (SPD) entered the halls of power. One hundred days later, expectations for the new coalition to quickly restore planning security for companies and avoid noisy internal disputes for many observers have been dashed – including in climate and energy policy, where these were not high to begin with.
Merz’s arrival as chancellor delivered a new sense of resolve to Europe’s largest economy on the international stage at a time when global changes in trade and security, and a surge in right-wing populism at home and across Europe, have challenged Germany’s post-war economic model. At the same time, key parts of Germany’s energy transition required swift action after being left in limbo due to the early demise of the previous government coalition under chancellor Olaf Scholz.
The coalition set out on a platform of economic recovery, lower energy prices, and swift decision-making. Three months in, gaffes in political management and communication by Merz’s administration have contributed to a perception of the new government struggling to deliver on promises made during the election campaign. Many conservative voters resented the governing parties’ opening move of easing the country’s constitutional limit on new government borrowing to afford it greater leeway in tackling challenges ranging from security to climate. The so-called “debt brake” played a decisive role in capsizing Scholz’s government after Merz’s CDU successfully defended the cap in court.
+++Ahead of the German election in February, Clean Energy Wire outlined key urgent climate and energy tasks for the next government. Each infobox provides an overview of the status of these after the first 100 days in office of chancellor Merz’s cabinet+++
Agree on reconciling national debt brake with urgent need for new investment
Even before taking office, chancellor Merz secured a majority in parliament for the necessary constitutional reform that allows Germany to take on 500 billion euros in additional debt for infrastructure and climate investments over the next 12 years. Before the election, Merz had lambasted the idea of vast amounts of new debt, and now faces criticism from within his own camp for this turnaround. Still, it gives the government room for manoeuvre, but parliament must now approve setting up the special infrastructure and climate fund, which was decided by the cabinet.
Even more importantly, lawmakers must negotiate the government’s draft budgets for 2025 and 2026, which lay out the first details of how the funds will be used. NGOs, researchers and industry associations have criticised a lack of focus on climate action, as well as budget cuts for clean tech such as hydrogen.
Lead efforts to ensure unified EU on international stage as Trump shakes global order
Chancellor Merz and many of his ministers have emphasised time and again that they seek closer ties with European neighbours and quickly paid first visits to their counterparts in France, Poland, or the UK. Merz has said that partners in the EU were waiting for a strong Germany in the bloc and has sought to portray assertiveness in foreign policy. Merz is building himself up to be a key European contact with US president Donald Trump and promised to build up Germany’s military into the strongest conventional army in Europe.
At the same time, Merz – with German interests in mind – pushed for a quick trade deal with the US – which has since been criticised as a bad deal for Europe.
In climate policy, the EU talks about a climate target for 2040 and a new 2035 climate plan under UN rules are first pointers that the new government continues to support agreed targets but is unlikely to raise the ambition. The coalition’s call for using climate projects in other countries to count towards the EU 2040 emissions reduction target was included in the EU Commission’s proposal. EU governments are set to decide on the target in September. Economy minister Reiche’s visit to a meeting of pro-nuclear energy governments in Europe does not mean a reversal of Germany’s phase-out but rather signals a new openness by the government regarding the topic and could help ease tensions with neighbours.
Moreover, a decision to exclude households and small businesses from a reduction in electricity tax stunned those who expected lower energy prices across the board to continue to be a government priority after the election. It also revealed that despite the record-breaking new debt and relaxed debt limit rules Merz’s coalition has agreed on, financial constraints continue to be a restricting factor for the new coalition too. The draft budget planned until 2029 still has a gap of more than 170 billion euros that the government must fill, either by increasing its earnings or cutting expenditures.
Loud quarrels among the coalition partners over picking new judges for Germany’s constitutional court then suggested the highly unpopular coalition infighting of the Scholz era might also continue under Merz. A survey by broadcaster RTL released on the eve of the traditional 100-day grace period backed this impression, with Merz’s CDU/CSU alliance dropping to the lowest approval level since the election and ceding the first rank to the far-right party Alternative for Germany (AfD).
Activists and economists warn against neglecting green industry's potential
On energy and climate, the chancellor openly questioned whether Germany could reach its target of achieving climate neutrality by 2045, and criticised EU considerations to mandate car-rental firms to only buy EVs from 2030. His conservatives have repeatedly called for a reversal of the agreed EU ban on new combustion engine cars from 2035. At the same time, his administration decided to finance price cuts for fossil gas through the country’s Climate and Transformation Fund (KTF).
“At a time of radically altered geopolitical, ecological, and technological background conditions, the government increasingly bets on ‘old’ industrial strengths in the spirit of the 1990s,” Christoph Bals, chief policy officer at climate NGO Germanwatch, told Clean Energy Wire. The competitiveness of low-carbon technologies should take centre stage in the government’s quest for economic revival, Bals argued. This, for example, would include economic policies that focus on the technological advantages and growth markets unleashed by the energy transition.
However, policies put in place by the previous government – such as boosting green steel production – have run into difficulties in the interim. The Germanwatch policy officer said strengthening green lead markets for heavy industry would be a step desired by industry and promised in the coalition agreement, but the government so far had shown little interest in backing them. Turning away from these approaches “would be costly, damage the climate, and undermine competitiveness,” Bals warned.
The NGO leader’s criticism of a lacking growth strategy was mirrored in a survey by research institute ifo: the massive increase in borrowing would not be sufficiently accompanied by decisive reforms and instead help fund costly projects such as a ‘mothers’ pension,’ the surveyed economists said. About half of respondents expected the measures taken to at least trigger short-term growth effects, while only about a third said these will be sustained in the medium run. Forty-two percent of those surveyed gave the government bad marks for its initial performance, while only 25 percent viewed it positively.
Improve heavy industry competitiveness while pushing decarbonisation forward
The government has cut funding plans for industry decarbonisation in the federal budget in the coming years. However, it also decided to extend the decreased electricity tax for the producing industry and proposed tax benefits for companies, including when purchasing EVs as part of an “immediate investment programme.” It also decided to lower gas prices for consumers by abolishing the country’s gas storage levy. All of this has yet to be adopted in parliament.
The European Commission at the end of June gave the green light for state aid, such as the government’s planned industry power price for energy-intensive large companies. However, the EU has set tight guardrails, which industry associations say would significantly blunt the scheme.
The government also introduced draft legislation to speed up public procurement, including the option of setting up climate requirements, and plans to use these to create "lead markets" for climate-friendly products. However, the reform has yet to get through parliament before the government can work out the respective regulation.
Germany’s long-standing recipe for industrial success has been challenged by losing access to cheap Russian gas, reliable international demand for products “Made in Germany,” and US security guarantees. There is a broad consensus that the government must take rapid action to lower industry energy costs and clarify decarbonisation subsidies to provide long-term planning security, which companies demand above all else.
Economy and energy minister Katherina Reiche (CDU) compounded uncertainty over the future course of the energy transition by announcing a “reality check” for the expansion of renewables and grid infrastructure. According to the coalition agreement, the monitoring report, expected after the summer, will form the basis of future energy policy in the country. Activists fear it could end up halting the momentum in solar and wind power buildout achieved under the previous government.
NGO Friends of the Earth Germany (DUH) warned the report could amount to “grade A clientelism” for fossil companies, as gas infrastructure would likely be pushed while solar power support would likely be cut. Germanwatch’s Bals stressed that it would be “dangerous” to base the report on unrealistic forecasts of future power demand that could lead to the reduced expansion of renewables. This especially concerns the transport and heating sector, where important policy packages that could determine the roll-out of electric vehicles, heat pumps, and other technologies are eagerly awaited – and where lower assumptions would translate into lower clean energy demand.
Clarify the path to climate-friendly transport – for citizens and carmakers alike
A large part of the 500-billion-euro infrastructure and climate fund will go to climate-friendly transport, such as the country’s ailing railway system. Transport minister Patrick Schnieder has promised to present a package of structural reforms to the country’s national railway system and state-owned operator Deutsche Bahn (DB) by the end of summer.
Government advisors in July presented to Schnieder a package of proposals for measures to clean up German transport. In the car sector, the government has promised new purchase incentives, and already drafted tax benefits for company EVs. Chancellor Merz’s conservatives had called for a reversal of the EU 2035 ban on new combustion engine cars prior to this year’s federal election in Germany, but the policy did not make it into the coalition agreement his party made with the Social Democrats (SPD).
Germany’s transport sector is one of the biggest hurdles to reaching the country’s 2030 climate targets, while troubles at its iconic carmakers VW, Mercedes and BMW, as well as its national railway system, make headlines. The automotive industry, which employs around 800,000 people in the country, is struggling to master what it calls the “biggest industrial transformation” of its history. Companies as well as consumers urgently need clarity on the way forward. The collapse of electric vehicle sales following sudden subsidy cuts in 2023 has shown the heavy costs of policy zigzag. EV production in the country is on the rise again in 2025 and German manufacturers benefit from Tesla’s slide in sales.
Heat buildings with fewer emissions while keeping homes affordable
It remains unclear how the government intends to reform the law that governs the move away from fossil fuel heating, the Building Energy Act. It had promised to “abolish” key elements of the previous government's law package, especially regarding a mandatory fossil heating phase-out, causing widespread uncertainty in the sector and keeping many customers from investing in costly new climate-friendly systems. Building minister Verena Hubertz promised “technology-neutral, flexible, and simple” requirements in the future and hinted that the changes made would likely not be significant.
Germany currently has a plan to gradually phase out oil and gas boilers, which are the main cause of emissions in the buildings sector. Passing the "heating law," which spells out this plan, was, however, mired in controversy and tremendous backlash for former economy minister Robert Habeck from the Green Party.
To incentivise the move to cleaner heating alternatives, Germany has a levy known as the carbon price for emissions in the sector. This national carbon price will have to be integrated into an EU-wide system in 2027 and is set to increase significantly. Agencies have warned that especially the poorest households might not be able to react to these rising prices by implementing energy efficiency measures, such as insulating homes or installing heat pumps, and thus need better protection. New environment and climate minister Carsten Schneider has said that the government would pay special attention to the social implications of climate policy.
Over 70 percent of the country’s buildings are still heated with fossil fuels, and the sector is set to miss its 2030 emission reduction target.
Heating industry lobby group BDH and local utility representatives urged the government to provide clarity on decarbonisation measures as quickly as possible to allow much-needed investments to commence and prepare the market for the introduction of carbon pricing in the sector by 2027 under the EU’s new emission trading system ETS2.
“We’re still not expanding fast enough,” said wind power industry group BWE, pointing at the continuously underachieved expansion rates for wind and solar power despite recent upticks. Energy supplier Vattenfall and Germany’s central bank, the Bundesbank, also weighed in and urged the government to stay the course on shifting to renewables to maximise the country’s international competitiveness and to cut costs.
Economy ministry's energy transition monitoring must not change goal posts - energy industry
The Federation of German Association of Energy and Water Industries (BDEW) made a more lenient evaluation of the government’s first serve in energy policy, crediting it with taking “important intermediary steps” and earnest efforts to curb bureaucracy in the sector. With a view to the upcoming monitoring report, BDEW head Kerstin Andreae commented that a synchronisation of added generation capacity and grid transmission expansion is desirable. However, she added that “there is no doubt regarding the general and substantial long-term need for more renewable energy in Germany.” The report should therefore merely rank priorities and not change the goal posts, Andreae said. The industry group stressed that getting the long-overdue auctions for gas-fired power plants that serve as a backup for renewables remains a key step in this respect that the government has yet to take.
Due to the lack of concrete policy proposals, there is currently little evidence that the government will in fact downgrade climate action objectives. As stakeholders await the results of Reiche’s monitoring report and other policy decisions after the summer break, it therefore remains unclear whether Merz’s government wavering on decarbonisation is mostly an attempt to woo conservative voter groups. Five state elections are looming in 2026, meaning the coalition parties will be busy campaigning for a good part of the next year for the regional votes that could have a strong effect on the country’s balance of powers between the federal government and the states.
Provide adequate backup capacity for the growing share of renewable power
The new government is betting on fossil gas to complement renewables and ensure security of electricity supply. It aims to introduce auctions for state support to build 20 gigawatts worth of new gas-fired power plants by 2030, which experts say is very ambitious. Economy minister Katherina Reiche said that the auctions should start before the end of 2025 “if possible”. However, the scheme requires a green light on state aid rules from the European Commission, and negotiations are ongoing. The Commission might approve a much smaller volume and set strict conditions, which possibly includes a requirement to later convert the plants to run on hydrogen.
As Germany moves away from coal, the country needs backup power capacity to complement intermittent renewables at times of too little wind or sunshine. The former government had planned to incentivise the construction and operation of several gigawatts of gas plants that are later to be converted to run on hydrogen and hydrogen power plants, but the relevant reform did not make it through parliament.
The Federation of Germany’s Gas and Hydrogen Industry said the ongoing uncertainty over the H2-ready gas plant auctions that are needed as a backup reserve for renewables to allow the phase-out of coal were especially disappointing. “These auctions have been overdue for almost three years now,” said the industry group’s spokesperson, Bengt Bergt.
For the Federation of German Industries (BDI), the government has adequately addressed concerns about industrial competitiveness that could help it to enter the upcoming election cycle with better economic figures. The focus on investments in the budget drafts was testament to its will for carrying out reforms, said BDI president Peter Leibinger. At the same time, reduced costs for gas storage and electricity grid fees and taxes would make prices more competitive, he added.
“This creates a real opportunity for an economic upswing next year,” he said. Despite an “investment booster” that expands write-offs and reduces corporate taxes, growth forecasts so far do not indicate a decisive upturn in the country’s economic fortunes.
Leibinger said investor security and a sustained high support level for transport, buildings, and other areas through the 500-billion-euro special fund for infrastructure and climate neutrality would be key to achieving a turnaround.
Regarding Germany’s role in the EU’s planned new and “highly ambitious” 2040 climate target of reducing emissions by 90 percent, the industry group supported the government’s efforts to introduce more flexibility in emission reductions. This includes the “credible” offsetting of emissions outside the EU, as well as carbon removal investments within the bloc.
The government has put forward draft reforms to widely adopt carbon capture and storage (CCS) or utilisation (CCU) technologies, which can partly also be used in efforts to remove CO2 from the atmosphere and permanently store it underground.
Provide industry with clarity on carbon capture and storage (CCS)
Germany’s government cabinet in early August 2025 adopted a draft law to allow and promote the large-scale buildup of carbon storage and transport infrastructure in Germany. The legal changes would mean that relevant projects are “of overriding public interest,” simplifying planning, permitting, and construction. Industry welcomed Germany’s second attempt at the reform, which would allow underground storage under the seabed and open the door to a broad application of carbon capture and storage (CCS) or utilisation (CCU) as part of climate action efforts – including on gas-fired power plants.
Climate researchers say that – in addition to emission reduction efforts – technologies to capture and permanently store CO2 will be needed for Germany's contribution to limiting the global temperature rise to two degrees Celsius or less. This is why the previous government ventured to pave the way for CCS and CCU (carbon capture and use), mainly for industrial processes where emissions are difficult or impossible to avoid. However, the reform did not make it through parliament before the collapse of the former coalition. Until now, CCS has been either prohibited or at least limited by law.
Environment ministry stresses need for unity on climate targets
While industry welcomed the focus on flexibility to reach a 2040 target, the country’s Council of Experts on Climate Change warned that the climate policy elements of the coalition agreement poses the risk of missing national emission reduction targets. The council urged the government to present an adequate Climate Action Programme, which any new government is legally obliged to deliver within the first year. The programme is meant to put the country back on track to reaching mid- and long-term climate targets, and relevant ministries must present first draft proposals by the end of September.
Ensuring the government stays on track towards its climate targets thus falls on environment minister Carsten Schneider (SPD), who promised to deliver the new package of climate measures before the end of 2025.
Schneider, who reaffirmed Germany’s determination to reach climate neutrality by 2045 in reaction to Merz’s doubts, has repeatedly warned against the potential damage to social cohesion if the introduction of EU carbon pricing in transport and heating is not cushioned by support for citizens. The ETS 2 is currently set to take full effect at the beginning of 2027.
Schneider stressed that the government should rally behind a climate action programme that enjoys “full political support” to ensure the coalition enters the 2026 state election year on solid footing.
