Climate Change Policy and German Federalism

Energy Policy 74 (2014) 383–394

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Allocating greenhouse gas emissions in the German federal system: Regional interests and federal climate governance Jochen Monstadt n, Stefan Scheiner Division for Spatial and Infrastructure Planning, Darmstadt University of Technology, Germany

H I G H L I G H T S

Profound study of renewable energy policy and emission trading in Germany.

Study of joint-decision making in climate policy in the German federal system.

Intergovernmental conflicts and agreements in allocating GHG emissions.

Policy outcomes, potentials and restrictions of federal climate governance.

art ic l e i nf o

a b s t r a c t

Article history: Received 16 May 2014 Received in revised form 22 August 2014 Accepted 2 September 2014 Available online 2 October 2014

The academic debate on climate policies often portrays Germany as one of the most successful cases.

Despite its federal system of joint decision-making, most studies of German climate policy focus primarily upon activities at the national level while disregarding the heterogeneous economic interests and veto options of the Länder. Using the cases on renewable energy policy and emission trading, we analyze the subnational interests and institutional mechanisms that shape the intergovernmental negotiations and policy outcomes within the federated system. The cases confirm assumptions made by general research on German federalism, according to which strategies for the externalization and compensation of costs are of particular importance for redistributive policies, and the EU plays a major role in dissolving potential barriers to the process of federal policy formation. Contrary to the reservations often expressed, we demonstrate that climate policies have led to an increased economic and political competition between the Länder and have supported effective solutions. However, recent shortfalls in the effectiveness of emission trading and in the cost-efficiency of renewable energy policies indicate that redistributive conflicts in the allocation of greenhouse gas emissions have to be addressed more systematically within the German (and the European) system(s) of joint decision-making. & 2014 Elsevier Ltd. All rights reserved.

Keywords: Climate policy Cooperative federalism Germany Emission trading Renewable energies

1. Introduction Academic literature portrays German climate policy as comparatively successful in achieving ambitious CO2-reduction targets (cf. Michaelowa, 2008; Weidner and Eberlein, 2009). Analyses of German climate policy largely focus on the national government, which is regarded as both an important leader in climate mitigation and as one of the most important state actors in international and European climate politics. However, these analyses pay little regard to the fact that climate policy in Germany takes place

n Correspondence to: Franziska-Braun-Straße 7, 64287 Darmstadt, Germany.

Tel.: þ 49 6151 163648; fax: þ49 6151 163739.

E-mail address: j.monstadt@iwar.tu-darmstadt.de (J. Monstadt).

http://dx.doi.org/10.1016/j.enpol.2014.09.001 0301-4215/& 2014 Elsevier Ltd. All rights reserved.

within a federal state system in which the Länder (regional states) play an important role in the formation of climate policy. Because it has been given relatively little attention, until now it has largely remained unclear which interests, institutional arrangements and dynamics have driven or obstructed climate policies within the German federal system.

The fact that climate policy is a particularly important field of activity for political actors at the subnational level in federal systems has been shown by numerous studies on climate policy in other federal states. Comprehensive studies have been done of federal climate policies in the United States, Australia, Spain and Canada (cf. inter alia Nelson et al., 2014; Bailey and Maresh, 2008; Tábara, 2007; Macdonald, 2008). Those studies show that climate mitigations policies in federated states represent a political challenge since the individual subnational governments pursue very

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different regional interests, depending above all on the potential costs of and benefits from climate mitigation (cf. Nelson et al., 2014, 9). Those subnational interests are to a large degree related to the regional energy industries, the regional energy demand structures and the opportunities for climate mitigation in regional economies (cf. Macdonald, 2008, 231ff; Bailey and Maresh, 2008, 213ff; Tábara, 2007, 175ff). Articulation and pursuit of such subnational jurisdictional interest depends to a large degree on the federal institutional context and the connected logic of policy formation. The strongly decentralized distribution of federal environmental policy competencies in Australia, Spain and—to some extent—the USA have, for example, enabled subnational governments to promote ambitious climate policy initiatives (Schlager et al., 2011), while the de facto weak position of the central government in Canada's federal system has given Alberta extensive veto opportunities in Canadian climate policy (Macdonald, 2008).

German climate policy takes place in a policy arena with very heterogeneous subnational interests due to the considerable variation in regional economic structures. The share of electricity from renewable energy sources and the economic potentials in renewable energy industries differ greatly among the Länder, due to the latter's different geographical, fiscal and economic conditions. At the same time, the energy-intensive industries and the share of coal-based and nuclear energy industries are concentrated in individual regions. Those factors go hand in hand with obvious economic interests and distributional conflicts in the formation of climate policy because regional economic benefits and disadvantages of climate policies are distributed unequally.

Against the background of a consensus-oriented federal negotiation system in Germany, which is being considered as having a rather low capacity for political problem-solving in areas with strong regional (re)distributional effects (cf. Scharpf, 2009), the fact that German climate policy appears to be relatively effective compared to other (federal) states is thus surprising. Although comparative studies stress that the variable “federalism” can only to a limited degree explain the performance of environmental policy,1 the redistributional effects of effective climate policy in combination with the enormous influence of regional interests within the German federal system make the observed success of climate policy less likely and thus necessitate an explanation. This problem of negotiating (re)distributional policies to allocate greenhouse gas (GHG) emission is exacerbated by the fact that Germany's energy policy was traditionally considered as a policy field containing an additional possibility of stalemates due to the entanglement of party competition and federalism (Lehmbruch, 2000).

We assume here that the negotiation and decision-making process regarding the allocation of GHG emission reductions involves heterogeneous place-based interests respecting the (re) distribution of costs and benefits. Our key objective is thus to explain the decision-making capacity and the policy outcomes of German climate policy by analyzing the relations between the two levels of government instead of focusing exclusively on the national government. More particularly, we focus on the heterogeneous regional interests and the regionally unequal distribution of costs and benefits of effective climate mitigation on the one hand, and, on the other, on the simultaneously existing multitude of intervention, veto and noncompliance options for subnational

1 Especially quantitative analyses discuss if and how federated systems affect environmental policy (cf. Jahn and Wälti, 2007; Braun, 2000; Scruggs, 2003). While some studies see an advantage in centralized states (Scruggs, 2003; critically: Saretzki, 2007), other studies emphasize the need for a more differentiated view on the variable “federalism” (Braun, 2000) or point out that “federalism” is only an indirect variable, which has a positive impact only in combination with neocorporatist arrangements Jahn and Wälti (2007).

actors within the German federated system. Building on the debate on German federalism and on an analysis of the different national and subnational interests in German climate policy, we select the cases of two of the most important reforms in power supply—the promotion of renewable energies and emissions trading—to examine the dynamics and outcomes of the system of federal joint decision-making. We argue that federal jointdecision-making does not necessarily have to lead to stalemates or joint-decision traps. However, our case studies demonstrate that decision-makers have tended to eschew addressing major regional allocation conflicts in order to avoid federal stalemates. As a consequence, they promote costly measures or even ineffective climate policy solutions. Recent developments indicate that redistributive conflicts have to be addressed more systematically in the future in order to find more cost-efficient and effective solutions in allocating GHG emissions.

2. Methods We first introduce the debate on German federalism by providing potential explanations for why effective policy-making in Germany's system of cooperative federalism has been possible despite its risks of stalemates and redistributive conflicts between the Länder. Using the methodology of theory-testing with cases, we draw some hypotheses from this debate that guide our empirical study on the dynamics and outcomes of climate mitigation policy within the German system of federal joint decisionmaking. In order to empirically test these hypotheses, we select two of the most important policy reforms allocating German GHG emission reductions amongst the Länder. Renewable energy policy in Germany has been very successful when compared internationally and has induced an increase in the share of renewable energies in producing electricity from 3% in 1990 to 25.4% in 2013 (BMWi, 2014). The emissions trading system (ETS), which covers the entire EU, regulates about half of German CO2 emissions. Both policy reforms face heterogeneous economic interests of the Länder and potentially allocate costs and benefits unequally among the Länder.

The chosen qualitative case study design promises to gain the most heuristic insight. Next to testing and refining hypotheses, it allows an intensive examination of the complex and changing political interests and an investigation of complex variables of climate policy, along with the generation of new hypotheses.

Beyond the evaluation of academic literatures on energy and climate policy in Germany, our study is based on the analysis of a broad variety of documents (e.g. statistical surveys, party programs, parliamentary proceedings and hearings, climate programs or newspaper articles) as well as semi-structured interviews with experts from both levels of government, research and policy advisory institutions, energy industry and lobby groups conducted between 2010 and 2013.

3. Results 3.1. Climate policy as a matter of federal dynamics in Germany Germany has a federal system with two closely interlinked political levels. The constituent units of the federal system are the Länder, each of which has its own constitution as well as a parliamentary system of government, administrative departments and all the other elements of government. Institutions at the national level are the Federal Cabinet (with the Chancellor and, currently, fourteen Federal Ministries), the directly elected Federal Parliament (“Bundestag”) and the second parliamentary chamber

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(“Bundesrat”) representing the sixteen German Länder at the national level.2 Climate mitigation in the German electricity sector is primarily a matter of national legislation,3 which is complemented by voluntary legislation and measures of the Länder and initiatives of the municipalities (cf. Jörgensen, 2012; Weidner and Mez, 2008). In recent years, European climate policy has gained more importance and the EU has adopted several strategic programs as well as some binding framework directives which, however, give the member states a limited leeway in their adoption. In spite of the dominance of the national level in German legislation, various factors considerably strengthen the role of the Länder. First, they play a direct role in the enactment of all national legislation concerning their financial and administrative affairs through the Bundesrat (Hrbek, 2004). Secondly, the installation of renewable power plants and electricity networks depends heavily on the planning frameworks, land use regulations and nature conservation policies set by the Länder (Ertl, 2010).

Thirdly, the Länder provide support for the economic development of renewables. More than half of both the direct public investments for business-related infrastructure (e.g. energy competence centers, innovation networks, technology clusters) and the financing of education and R&D activities is provided by the Länder (Hellmann and Kullas, 2012).

In addition to an institutional structure within which the two political levels are strongly interlinked in formulating and implementing policies, the structure of the party system leads to strong pressure to collaborate (Kropp, 2010). Since the political parties are relevant players at both the national and the Länder levels, party interests play a major role in addition to Länder interests in the Bundesrat. Particular dynamics and challenges can arise when legislative reforms are characterized by a strong polarization between parties and require the approval of both the Bundestag and the Bundesrat. Those challenges are particularly intense when the majorities of the political parties in both of those legislative bodies do not concur (Lehmbruch, 2000). Political party considerations can thus be superimposed on negotiations of Länder interests and the veto potential of the Bundesrat can be exploited for party politics.

Beyond the legislative veto options of the Bundesrat in various matters, a fiscal regime of shared income and value-added taxes; vertical and horizontal “fiscal equalization” transfers, and the proliferation of jointly financed programs constitute Germany's system of cooperative federalism. That system is intended to create “equal living conditions” among and prevent “ruinous competition” between the Länder (Scharpf, 2005). Compared to other federal states, such as the United States, the literature on German federalism emphasizes that political and economic competition between the Länder is thus limited (cf. Benz, 2007).

(Re-)distributional conflicts are typical for German cooperative federalism, but are regarded as a considerable challenge to its ability for policy formation (cf. Braun, 2000, 12f). This “jointdecision trap” (Scharpf, 2005) through the extensive institutional intertwining of the federal government and the Länder, as well as that of competition among the political parties, often necessitates considerable coordination efforts, forcing the political actors to seek the broadest possible consensus (Kropp, 2010). Especially in policy fields with considerable regional redistribution effects, or which have strong polarizing effects among the political parties, that results in considerable limits to political problem-solving

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capacity (Scharpf, 1976, p. 21) and poses risks of stalemates. Due to those limitations, cooperative federalism tends to privilege costly distributive polices (or non-decisions and incremental reforms) over redistributive policies that exacerbate conflict within the federation over the reallocation of costs and benefits.

However, various strategies can be observed in different policy fields by means of which the political actors minimize these risks of stalemates and increase the problem-solving capacity of the political system (cf. Kropp, 2010). First, such strategizing is particularly the case when the national and Länder governments are able to pass on the costs to third parties “not directly represented in their intergovernmental ‘cartel’” (WachendorferSchmidt, 2000, p. 100). Examples of those third parties can be future generations, or self-governing bodies such as universities and municipalities (ibid., p. 102). Secondly, other studies show that the national government can lessen redistribution effects via compensation mechanisms from its own funds (e.g. direct support or an increase in the Länder share of tax income) or via “buying” the agreement of individual Länder by granting financial or other advantages (cf. Scharpf, 1985, p. 335). That strategy largely depends on the national government's motivation for negotiation, both financially and with regard to the political importance of the policy's contents, and is therefore most likely when the national government is under more pressure to succeed than the Länder governments.

Germany's cooperative federalism has thus been criticized for increasing policy-making costs, for reducing governmental problem-solving capacity, and for causing stalemates (Scharpf, 2009). However, recent analyses have emphasized that in addition to strategies of cost externalization, package deals or compensation, stalemates can thirdly be avoided through impulses from actors outside of the federal negotiation system. Independent institutions such as the Federal Constitutional Court or, with the Europeanization of numerous policy fields, the European Union (EU), are thus important players. Many policy fields—among which climate policy is a prominent example—can increasingly only be understood in a multilevel context with intrinsic policy-making dynamics (Benz, 1998). Federalism research regards the EU as potentially supportive in decision-making within the German federal negotiation system, allowing for reducing the risks of stalemates (Lehmbruch, 2000; Wachendorfer-Schmidt, 2000).

Based on these findings of federalism research, we can draw some hypotheses providing potential explanations for why in the case studies effective policy-making in Germany's system of cooperative federalism has been possible despite risks of stalemates and of redistributive conflicts between the Länder: 1. the policy measures will be accompanied by strategies to preserve the status quo with regard to vested interests; 2. redistributive policies will only be decided upon when accompanied by cost externalization strategies, package deals or compensation, or by the shifting of decision-making to the European level; 3. effective climate policies will only be decided upon if they have no strong polarizing effect on party politics; and 4. elements of competition among the Länder will not play a major role.

3.2. German climate policy and GHG emissions: targets, sectors and regional interests 2 The votes of the Länder within the Bundesrat are allocated according to their size but do not reflect the number of inhabitants in exact proportion. They vary from 6 for the largest Länder to 3 for the smallest ones.

3 This includes the definition of resource- and plant-specific regulations, energy efficiency standards, approval procedures for the building and operation of power plants, economic incentives or planning regulations.

Fundamental decisions as to the reduction of GHG emissions above and beyond the “wall-fall profits” being achieved up to the mid-1990s were made by the climate policies of the Red/Green national government which was in office from 1998 to 2005.

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The central objectives were a marked increase in the share of renewable energies, the waiving of the climate policy option “nuclear energy” in the medium term and a (moderate) increase in the price of electricity generation based on fossil fuels (Jänicke, 2011, p. 131f.). Up until the present day, climate mitigation has been focused more upon energy supply than demand, and climate mitigation activities in the areas of efficiency increases, energy saving and transport have partially been neglected (Hennicke et al., 2012; Hey, 2010). Despite the change in government from Red/Green to a grand coalition of Conservatives (CDU and CSU) and Social Democrats (SPD) in 2005, German climate policy has shown a high degree of continuity. This can be explained partly by the fact that the SPD-led Federal Ministry of the Environment held a strong position within the coalition. When a coalition of the conservative and liberal (FDP) parties came into office in 2009 it first aimed at slowing down the phasing out of nuclear energy as an option for the reduction of GHG emissions. Following the nuclear accident at Fukushima in 2011, however, the national government changed its policy direction: under the discursive framework of the German “Energiewende” the cross-party agreement has since been to phase out nuclear energy completely by 2022 (cf. Hennicke et al., 2012, p. 6). At the same time the conservative-liberal government and its succeeding government formed by another grand coalition in 2013 have maintained the existing ambitious climate policy objectives, namely to reduce CO2 emissions by 40% by 2020 (80% by 2050), to increase the share of renewable energies in electricity supply to at least 35% by 2020 (40–45% by 2025 and 55–60% by 2035) and to increase energy productivity by approximately 2% per year (BMWi, 2014, p. 2).

Complementary to the national level, in the last fifteen years all the Länder have developed own climate mitigation programs (cf.

Kern, 2008; Jörgensen, 2012). Most of them have been updated during the last few years and quantify emission targets. The others support the national GHG emissions reduction target but do not set individual Länder targets (e.g. Saarlands Climate Mitigation Program 2008–2013). Due to their different economic structures the reduction of GHG emissions plays very different roles in the individual Länder. The Länder Brandenburg, North RhineWestphalia (NRW), Saarland, Saxony and Saxony-Anhalt can be classified as “high-carbon states”, as they have by far the highest CO2 emissions per capita in their electricity generation (see Fig. 1) due to the existence of energy-intensive industries and the high share of coal-based power generation. For these Länder it is to be expected that ambitious climate policies would challenge them with greater restructuring and investment requirements than would be the case for the “low-carbon states”. With regard to

the absolute level of emissions, NRW is in a unique position because about one-third of all German GHG emissions are generated within NRW, followed by the other large Länder which are each responsible for about 8–10% of total German emissions (Statistische Ämter der Länder, 2013).

If we compare the climate policy programs of the Länder, it is obvious that the regional economic interests outlined above are also reflected in their climate policies. The “high-carbon states” mostly represent an approach to climate policy that prevents threats to the existing coal industry, and emphasizes the importance of efficiency policies and the potentials of carbon capture and storage (e.g. Climate Mitigation Concept NRW from 2001/ 2008; Energy strategy 2020 of Brandenburg). Similarly, the Länder which were traditionally governed by the conservative parties and which had (and beyond Hesse still have) a large share of nuclear power generation (Bavaria, Baden-Württemberg, Hesse), had for a long time emphasized the need for nuclear power as a climate policy option and for energy efficiency, while their wind energy policies were rather restrictive before Fukushima. Most of the economically disadvantaged Länder (e.g. Brandenburg, Mecklenburg-Vorpommern, Thuringia and Schleswig-Holstein) have adopted comparatively ambitious climate mitigation programs with regard to the reduction of CO2 emissions, and especially respecting the development of renewable energies (cf. Diekmann et al., 2010). Some of the corresponding policies to promote climate mitigation and particularly renewable energies have significantly changed in the last fifteen years, which indicates that climate policy in these Länder is increasingly regarded as an opportunity for the economic development of rural regions. Moreover, subnational climate policies reflect different party positions at the level of the Länder. Although climate mitigation is a policy area in which we can identify a general cross-party consensus regarding the overall GHG reduction goals, political parties favor very distinctive policy options: those Länder in which the SPD and/or the Greens form a government follow markedly more ambitious objectives than those with a conservative or liberalconservative government. That can be seen most clearly following the latest changes of government in NRW (2010), BadenWürttemberg (2011), and Lower Saxony (2013).

While the study of climate mitigation programs of the Länder provides valuable information on the political preferences of the Länder and the parties, the analysis of those non-binding programs rarely indicates the (re-)distributive conflicts within the federal system. Those conflicts are negotiated within the individual regulatory approaches in climate mitigation which implicitly allocate the GHG emissions among the Länder, and—due to their

350 300 250 200 150 100

1990

50

2000

0

2011

Fig. 1. CO2 emissions from power generation in selected Länder 1990, 2000 and 2011 (Data of Bavaria, Brandenburg, and Saarland from 2010; data of MecklenburgVorpommern and Lower Saxony from 2009) in kg CO2/GJ (Data: Länderarbeitskreis Energiebilanzen, 2014).

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heterogeneous prerequisites for renewables, the carbon-intensity of their industries etc.—regional economic benefits and detriments.

3.3. Negotiating climate mitigation in the German federal system The previous section has shown the widely differing party positions and regional economic interests with regard to energyrelated climate policy, both among the Länder and also between individual Länder and the national government. The following case studies show how, despite the different interest constellations, major climate policy reforms have been initiated and adopted in the system of cooperative federalism.

3.3.1. Promoting renewable energies In the early period of the development of renewable energies, it was primarily certain Länder and not the federal government, that initiated major reforms in renewable energy policy (cf. Suck, 2008). While initially only launching a large-scale research program on renewable energy, the national government finally implemented the first national legislative framework to support renewable energy in 1991 (Michaelowa, 2005, p. 194). This “Feedin Tariff Act” was based on previous experiences and programs at the level of the Länder (Suck, 2008, p. 116, 161) and induced the initial growth of renewable energies, especially wind, biomass and hydroelectric power.

Two challenging developments took place at the end of the 1990s. Firstly, the prospect of decreasing market prices for electricity, due to on-going liberalization in the second half of the 1990s, made investments more uncertain and the growing German renewable energy industry demanded a decoupling of feedin tariffs from the general development of market prices (Michaelowa, 2005, p. 195). Secondly, the strong increase in renewable power generation, especially through the installation of wind-power plants, affected high reimbursement costs for the utilities particularly in the maritime regions (Suck, 2005, p. 171). The resulting high electricity prices strongly challenged the energy-intensive industries in maritime regions. Consequently, the northern Länder called for a solution (Interview 11; Suck, 2008, p. 328).

As a reaction to both challenges, the Renewable Energy Act (REA) introduced fixed payments to renewable energy generators for the first twenty years after installation (independent of the general market price of electricity) and considerably increased the feed-in tariffs in 2000. In contrast to the former regulation, the REA established an equalization scheme ensuring a nationwide non-discriminatory allocation. That scheme eliminated the different regional payments for renewable electricity by pooling the payments amongst the operators of the transmission networks and then distributing these costs equally among all electricity consumers in the nation.

During the consultations on the REA it became obvious that renewable energy policies were increasingly becoming a subject of party conflicts. Whereas the “Feed-in Tariff Act” had been supported by a broad majority of parliamentarians from all the parties, the REA was forced through the Bundestag against the votes of the conservative and liberal opposition. However, in the Bundesrat (which needed to approve the REA), regional economic interests dominated (Hirschl, 2008, p. 146). Since conservative-led Thuringia, in order to support the regional biomass industry, voted for the draft law, the law could pass, although the national government's parties did not have a majority of their own in the Bundesrat. Regional economic interests also played a role in introducing a hardship clause, which was introduced into the REA in 2003. The Federal Minister for Economic Affairs at the time, who had been prime minister of NRW until 2002, succeeded in excluding 560 energy-intensive industrial customers from the

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equalization scheme (Jacobsson and Lauber, 2006, p. 269)—privileging particularly NRW's industry.

In contrast to the “defector” Thuringia, the conservative parties which ruled the large Länder tended towards party polarization regarding renewable energies policy over time. The conservativeled Länder governments of Baden-Württemberg, Hesse and Bavaria criticized above all the expansion of wind energy at the expense of nature and landscape conservation. To strengthen their position, they enacted planning regulations restricting the installation of wind energy, and they succeeded in reducing the financial support for wind energy in the course of the negotiations on the amendment of the REA in 2004 using their majority in the Bundesrat (Hirschl, 2008, p. 162). While that combination of planning restrictions and reduced financial support has moderately slowed-down the expansion of wind energy (Büsgen and Dürrschmidt, 2009, p. 2541), the rapid growth of renewable energies induced by the REA could not be stopped.

In contrast to a fundamentally critical position of the national CDU and FDP on the growing costs of renewable energies, the opposition of the CDU/CSU-led Länder was limited to a critique of wind energy. The considerably higher tariffs for photovoltaic installations in the REA 2004 were, however, not criticized, since particularly Bavaria and Baden-Württemberg had very favorable conditions for photovoltaic (and biomass) installations (see Fig. 2).

House owners, local installers and agriculture in the two southern Länder thus clearly benefited from the REA. Other Länder governed by the CDU (Sachsen, Thuringia, Sachsen-Anhalt) also benefited from the support for photovoltaic installations because numerous businesses in the strongly expanding photovoltaic industry established or expanded their production there.4 Due to those regional interests, the national CDU/FDP government, which was in power between 2009 and 2013, found itself in conflict over the adjustment of the tariffs with a number of CDU/ CSU-led Länder governments that protected their renewable industries. (Interviews 1, 4 and 11). Due to those heterogeneous and conflicting interests within the CDU/CSU, a majority within the conservative parties was unobtainable for radically reforming the REA and for slowing the rise in REA payments as was originally intended by parts of the national CDU and especially by its coalition partner, the FDP. This dynamic in the federal system allowed Germany's international leadership position in the renewable energy domain, which included an increase in renewable power generation from 6.2% in 2000 to 25.4% in 2013 (BMWi, 2014), as well as a majority of the 378,800 jobs in the renewable energy industry in 2012 (AEE, 2013, p. 5). However, the REA came under pressure from the European Commission since a reduction was granted to energyintensive companies on the surcharge promoting renewable energy sources in Germany (“REA-surcharge”). These derogation rules for an increasing number of industrial customers amounting to presumably €5.1 bn. in 2014 (BMWI and BAFA, 2014, 18) were considered an impermissible aid under EU rules. Moreover, the REA has been facing increasing controversies in public debate due to the increasing payments under its equalization scheme. Due to their increase from €1.5 bn. in 2000 to an estimated amount of €23.6 bn. in 2014 (BDEW, 2014, p. 47), the resulting increase in electricity prices (see Fig. 3) has gradually become an issue of

4 Since the end of the 1990s, the renewable energies industry has developed continually into one of the most important industrial sectors in Germany. Since then, both the industry's total turnover and employment have markedly risen.

Particularly, the northern and eastern Länder were able to benefit from this development: beyond the installation of wind and solar energy plants, they were able to attract various sites of plant engineering and construction and thus created a relatively large number of jobs (Ulrich et al., 2012).

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35% 30% 25% 20% 15% PV 10%

Biomass Wind onshore

5% 0%

Fig. 2. Shares of electricity generation from renewable energy sources in 2011 (Data: BDEW, 2014).

6.24 5.28

3.53

3.59

2.05

0.19

0.25

0.36

0.37

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0.65

0.78

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Fig. 3. Development of the REA-levies (ct/kWh) for private households 2000–2014 (Data: BMU, 2013).

consumer protection, especially of economically disadvantaged customers.

With the growth of renewable energies, the redistribution mechanisms of the REA also provoked conflicts within the federal system. While the key beneficiary Bavaria had a positive balance of €0.8 bn., the energy users of NRW had to transfer €2.9 bn. to renewable energy plants in the other Länder (BDEW, 2014, p. 84).

Moreover, due to the considerable expansion of wind energy in the North and in rural areas, together with the phasing-out of nuclear energy, Germany's National Energy Agency has been calling for massive investments in the extension of the transmission network transporting electricity to the industrial and energy load centers in the South.

At the end of 2013, a new grand coalition took power in the national government, announcing structural reforms. In a first legislative reform step that came into effect in August 2014 (“REA 2.0”), the national government introduced (flexible) caps for the growth of each division of renewables to focus on the most cost-efficient

technologies and to limit the reductions in the REA-surcharge for large industrial energy users. In a second reform step to be introduced in 2017 (“REA 3.0”), the price for renewable energies shall no longer be defined through fixed feed-in-tariffs but through the introduction of auctioning mechanisms (ibid.). The reform has been accompanied by the articulation of considerable protest by the Länder, blurring lines between political parties and regional interests of the Länder. Various Länder have thus announced their concerns and objected to reform elements: While NRW called for the perpetuation of the status quo in the derogation rules for its industries, the coastal Länder in Northern Germany, plus Rhineland-Palatinate and Baden-Württemberg, with their ambitious plans to expand the use of wind energy, lobbied for more generous caps and higher funding, and Bavaria and Thuringia pushed for bioenergy (and photovoltaic electricity).

However, an “energy summit” of the national government and the Länder in April 2014 reached an agreement on the reforms. Until the next REA reform in 2017, it was agreed that the promotion

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mechanisms will not change, and the flexible caps for each renewable sector will be increased slightly conforming to their growth patterns in the years before.5 The federal agreement on the reform, however, raised the concerns of the European Commission regarding compliance with EU state aid rules. Consequently, the national government had to curtail the partial exemption of own consumption of power by operators of power plants (“autogeneration”) from the EEG surcharge and the derogation rules for large industrial energy consumers. Moreover, the European Commission required to progressively open up the domestic renewable electricity markets up of tenders to operators located in other Member States.

In summary, the interlacing of party interests with the regional economic interests of the Länder has mostly perpetuated the status quo of the promotion scheme for renewable energies from 2000.

Apart from incremental reforms by the national government, the economic interests of the Länder in the promotion of renewable energies have prevented a political change of direction in the federal decision-making system. Beyond a multi-partisan consensus on promoting renewables, one of the key reasons for the maintenance of the status quo was that the costs for the development of the renewable energies were not borne by the Länder budgets but were institutionalized as financial flows from the consumers to the producers. Over the years, the locational advantages from the generation of renewable energies and the respective industrial manufacturing plants became important issues for the environmental and economic policies of various Länder. The institutional mechanisms of the REA and their perpetuation over fifteen years reduced potential conflicts over the regional (re-)distribution of costs through their externalization to the detriment of household consumers. At the same time, they triggered considerable interregional competition for participation in the REA-induced financial flows. While the EU Commission has for a long time rarely intervened into the federal joint decision-making, the latest REA reform reflects its growing influence by curtailing the privileges for large energy consumers and auto-generators as well as by pointing out that a new law is required by 2017 to extend the competitive mechanisms of renewable energy policies.

3.3.2. Introducing the European emissions trading system With the introduction of a Europe-wide CO2 emissions trading system in 2003/2004, an instrument was integrated into German climate policy that emphasizes the utilization of market mechanisms much more strongly than the approach to that point. There were thus fundamental reservations to the introduction of emissions trading, both at the national level and at that of the Länder (Ziesing, 2009, p. 348f.). Despite its initial resistance, the national government, however, failed to prevent a mandatory ETS (Skjaerseth and Wettestad, 2008, pp. 109–115).

After failing at the EU level, conflicts arose within Germany over the division of jurisdiction between the Länder and the national government. Since traditionally the Länder conduct enforcement of national legislation almost exclusively, they also claimed full enforcement responsibility with regard to the ETS. The national government, on the other hand, preferred a shared jurisdiction but with the strategically most important tasks (e.g. technical management of the ETS, allocation of the allowances, monitoring, sanctioning) reserved for the national administration 5 Moreover, under the REA 2014 direct marketing will be the rule, and only a minority of new renewable power plants ( r500 kW) will still receive fixed feed-in tariffs. While the feed-in tariffs are still set by the law for new installations, the producers of renewable electricity will in principle be obliged to sell directly (or through a third party). They will obtain support in the form of market premiums paid on top of the market price for electricity, substantially covering the gap to the feed-in tariff amount.

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(Bundesrat, 2004, p. 163; Hartmann, 2004, p. 83). Due to the complex administrative approval procedures in each Land, an equal treatment of all power plant operators independent of regional economic or political interests would have been difficult to guarantee and oversee. Arguing with the threat of limited effectiveness, the national government called for the centralization of the key enforcement authority of the ETS (Interview 11).

Since the national government's proposal would affect the Länder, the GHG Emissions Trading Act (GETA)6 needed the approval of the Bundesrat, in which the conservative-liberal opposition had the majority of the votes and intervened in the negotiations on the GETA (Interview 10). In the end, the national government was able to push through its preference for shared competence by threatening the Länder that it would centralize enforcement exclusively at the national level (Hartmann, 2004, p. 110; Bundesrat, 2004, p. 163). This would have required extensive double approvals for the plants concerned, as they would have needed approval under both the GETA (enforcement at national level) and the already existing regulatory framework for air pollutants (enforcement at Länder level). Confronted with this threat, industry interests intervened, pressuring the Länder to accept shared competence (Hartmann, 2004, p. 110; Interview 11). Also, the smaller Länder only had limited administrative resources and accordingly did not object to the national administration of the ETS (Interview 11). NRW, on the other hand, had sufficient resources to administer the ETS and was—due to its energy and industrial structure—strongly opposed to the national government's proposals. Despite having a Red/Green government, NRW tried to influence the political process at different levels and attempted to organize a common position of all the Länder (Interviews 2 and 11).

Although NRW and the other large Länder governed by conservative and liberal parties represented two-thirds of the population and 90% of the highly affected industry, they were unable to convince enough smaller Länder to vote with them. Consequently, they failed to achieve a majority in the Bundesrat (Interview 2). In the end, a centralized authority was established within the Federal Environment Agency. The tasks of the new National Emissions Trading Agency were “the allocation and issuance of emission allowances, supervision and oversight, maintaining the National Register as well as national and international reporting” (Ziesing, 2009, p. 355).

After the general framework of the ETS had been established with the GETA, the conflicting interests of the Länder became apparent in the decision process on the National Allocation Plan (NAP). The NAP was intended to define the emissions budget for the 2005–2008 period, which included deciding on the total quantity of allowances to be allocated (the macro-plan), and setting the rules governing the quantity of allowances granted to installations on the basis of the available data (the micro-plan) (ibid., p. 357). The NAPs of the EU member states had to be sent to the EU Commission, which supervises the NAPs according to defined criteria. If the NAPs do not meet the EU criteria, the EU Commission has the authority to enforce their revision by the member states (Hartmann, 2004, p. 41). Since the CO2 emissions covered by the ETS vary considerably among the Länder (see Fig. 4), the Länder, together with the affected industries, negotiated intensively with the national government on specific ETS regulations and successfully lobbied for the modification of regulations for the benefit of their domestic economic interests (Interviews 10 and 11).

6 Besides the formal introduction of the ETS into German domestic law in July, 2014, clarification of jurisdiction was the key target of the legislation (Hartmann, 2004, 75). All questions with regard to the national budget of allowances and the rules of allocation were transferred to the National Allocation Plan, enacted in October 2004.

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Fig. 4. Carbon dioxide emissions by plants under the ETS, by Länder and sectors, 2010 (Source: Adapted from DEHSt, 2011).

Among others, the following special regulations were formulated in favor of the coal industry in different Länder:

A specific early actions rule took into account the past GHG emission reductions. This regulation was claimed by the Eastern Länder, which have invested in their generation system following unification, leading to tremendous reductions of GHG emissions at the beginning of the 1990s (Schleich et al., 2001). Especially in the new Länder with a large share of coal power plants, further investments in climate mitigation would thus have been at higher costs

than in regions with old coal-fired plants like in NRW (Interviews 10 and 13).

Also included were source-specific standards for new electricity plants that privileged coal-based power plants compared to low emission fuels such as natural gas. This standard impeded all incentives for a switch from coal to natural gas or renewables in the power generation, and was claimed by NRW with its high share of brown coal power plants (Interviews 10 and 13; Ziesing, 2009, p. 364).

The southern Länder benefited from derogation rules for those investments in fossil power plants that substituted nuclear

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power plants. These fossil power plants were granted free allowances (Michaelowa, 2004, pp. 325–327).

The various derogation rules heavily undermined the effectiveness of the NAP in climate mitigation. That result corresponds to the interests of many Länder in which the level of allowances was only about 1–5% below the business-as-usual scenario for the industrial sector (Michaelowa, 2004). Consequently, the overgenerous allocation7 almost caused the German ETS to collapse (Interview 10). Higher generation costs for the coal-based regions were largely avoided and coal-based power generation has since stabilized (Pahle, 2010) or even proliferated in 2013 by 8% (Hermann and Harthan, 2014, p. 10).

The NAP covering the next period (2008–2012) was enacted in 2006. Several reforms were introduced, e.g. there was no granting of allowances on the basis of “early action”, or of compensations with regard to a nuclear phase-out (Kemfert and Diekmann, 2006, p. 666). But again, the emissions allowances were very generous, and it was only due to the requirements of the EU Commission that the cap for emissions, initially set at 482 Mt per year by the national government, was reduced to 453 Mt (Ziesing, 2009, p. 370).

For the current period, 2013–2017, the ETS has changed completely.

A EU-wide cap has been introduced, and the authority to issue allowances has been transferred from member states to the EU. The main method for the allocation of allowances in the electricity sector is now auctioning (European Commission, 2013). However, due to a large over-allocation of allowances, in part because of the impact of the recent economic crisis in Europe, the ETS suffers from low trading prices, undermining the functioning of the carbon market and its incentives to phase out coal and to invest in new or even to operate existing gas-fired power stations. In 2013, the Commission has therefore taken the initiative to postpone (“back-load”) the auctioning of some allowances as an immediate first step.

In the end, the ETS in Germany's federal system of decisionmaking could above all be introduced due to pressure from the EU, which prevented stalemates provoked by individual Länder interests.

Moreover, distribution conflicts were resolved through generous derogation rules on the allocation of emission allowances. The ETS was thus introduced and institutionally anchored at the price of achieving only minor policy outcomes in climate mitigation. However, one of the key achievements was that the National Environment Ministry, in contrast to the traditional distribution of jurisdiction in the German federal system of clean air policies, enforced a centralized administration at the national level. On that basis, it seemed realistic that the introduction of a EU-wide cap and the allocation of the allowances based upon harmonized EU rules would allow for a more effective allocation of greenhouse gases in the third period of the ETS (2013–2017) limiting the leeway of the Länder to articulate their regional interests (Interviews 10 and 11).

However, as the over-allocation of allowances in the current phase of the ETS demonstrates, the distributive conflicts among territories have been passed on to the European level facing challenges similar to Germany's federal system of joint decision-making. Partially due to the low effectiveness of the ETS, Germany's GHG emissions have, for the first time since 1990, increased in 2012 and 2013.

4. Discussion Referring to our hypotheses, the case studies of both renewable energy policies and emissions trading confirm the major findings of federalism research that can explain the formation of Germany's 7 Energy economists estimate that in 2005 in Germany the level of allowances was about 21.3 million tons CO2 above real emissions (Kemfert and Diekmann, 2006, p. 668).

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climate policies. They provide evidence that policy-making in the German cooperative system privileges strategies that preserve vested economic interests of the Länder at the expense of effectiveness and cost-efficiency. Initially, the federal system of joint decision-making avoided redistribution effects where possible (or made them at least uncertain and up to future regulations), or involved strategies of cost externalization, package deals or compensatory mechanisms, or benefited from the shifting of decisionmaking to the European level.

In the case of emissions trading, the far-reaching concessions to economic interests represented by the Länder governments through the derogation rules in the initial phase—and the respective adjournment of an effective allocation—have contributed to finding an agreement. While considerably undermining the effectiveness of climate mitigation in the first and partially in the second period, package deals and interventions from the European Commission enabled the institutionalization of a potentially effective and unitary regulatory framework for the ETS. The strategic achievement in the introduction of ETS is, above all, that through avoiding an effective re-distributional approach in a long pilot phase, its mechanisms could successfully be introduced in the federal system without any major stalemates. At the same time, however, an effective regulation of carbon markets and with that, the allocation of regional economic benefits and costs, has been externalized due to the institutional anchoring of the ETS at the EU level—where the risk of stalemates between the EU institutions and its member states is not necessarily lower than within the German federal system. While the ambitious objectives of the ETS for 2020 demonstrate the progressive dynamics, which can emanate from the EU (LaBelle, 2012), recent failures to place an appropriate and transparent price on GHG emissions reveal similar dynamics as in the German federal system.

In the case of renewable energy policies, the introduction of the REA in 2000 allowed for an equal promotion of all domains of renewable energy from which all Länder could potentially benefit equally, while the impact on the incumbent energy industries was largely underestimated. With the growth of the REA-induced financial flows, regional workplaces and investments, the respective regional interests of the Länder have considerably changed the federal policy dynamics. There are four explanations for why this costly (re-)distribution mechanism could be implemented. First, the financial flows have been institutionalized outside of the state budgets. The resulting costs neither directly affect the finances of the national government nor those of the Länder, but are externalized to the users who are outside the intergovernmental “cartel”.

Secondly, the distribution mechanism has established a system of economic beneficiaries represented by the Länder. As recent initiatives to reform the REA demonstrate, attempts to curtail or to change radically the distribution mechanisms provoke considerable resistance and conflict from the Länder. Thirdly, NRW, as the key benefactor of this mechanism, has been compensated by the commitment of the national government to defend the derogation rules for its energy-intensive industries in its negotiations with the European Commission. Finally, it is only since the latest REA reform that the EU has opened the federal “cartel” of decisionmaking up for external impulses.

Both cases also confirm our hypotheses that the implementation of effective climate policies benefited from not having a strong polarizing effect on party politics. While energy policies have traditionally been a focal point of political polarization regarding both the phasing-out of nuclear energy and the promotion of renewables, recent multi-partisan agreements have prevented stalemates. With the growth of regional workplaces and investments in the renewable energy industry regional economic interests of the Länder have increasingly dominated earlier reservations of the conservative parties against the promotion scheme.

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Together with the changing priorities of the national party after the Fukushima disaster in 2011, they have partially neutralized former antagonisms and facilitated multi-partisan compromises.

Contrary to our fourth hypothesis, the success of the renewable policies can only be explained by its inducement of an extensive economic and political competition between the Länder. The REA has initiated competitive mechanisms between the Länder to economically participate as much as possible from the nationally organized financial flows for the installation of renewable energy plants and, indirectly, for plant engineering. While equalizing the costs for renewable energy investments nationwide, the REA has proliferated an interregional political and economic competition for attracting investments and workplaces in the renewable energy industry. The Länder have thus initiated reforms of their planning legislations, and set up regional plans and schemes to support the growth of renewables.

5. Conclusions and policy implications Most studies of the German climate policy regime have hitherto focused on its embeddedness in the European and international climate policy regimes, the initiatives of political leaders and the Federal Ministry of Environment and on the interpolicy coordination among relevant national ministries and their respective stakeholder groups. Insufficient attention has been paid to subnational allocation conflicts and the fact that climate policymaking takes place in the institutional setting of cooperative federalism in which the national government and the Länder have to interact cooperatively and collectively.

Our article thus explains through the lens of Germany's system of cooperative federalism its inherent capability to initiate and sustain ambitious climate mitigation programs and regulations despite the challenge of heterogeneous and potentially conflicting regional interests. The conclusion to be drawn regarding the effectiveness and efficiency of climate policies developed by the federated system is, however, ambivalent. The cases indicate that climate policies could be enacted since they minimized intergovernmental conflict and—in the case of the REA—induced interregional competition and provided economic incentives for the subnational governments to promote climate mitigation. As to renewable energies, recent joint decisions of the Länder and the national government will presumably stabilize and lock in previous growth patterns. However, despite recent interventions of the EU into domestic renewable energy policies their considerable contribution to climate mitigation still comes at the expense of rising energy prices for private households and small and medium-sized enterprises. In the case of ETS, the supranational level acted as a catalyst in preventing stalemates by defining a regulatory framework and by enforcing its compliance, but also allowed for extensive derogation rules. National-subnational agreements on a potentially effective institutional framework for the implementation of the ETS could be reached at the expense of adjourning an effective allocation of GHG emissions to the current ETS period. However, as the increase of GHG emissions since 2012 demonstrates, effective climate policy outcomes are still not in sight due to the limited capacity of both Germany's and the European Union's system of joint decision for adequately allocating the emission allowances and thus the costs and benefits of climate mitigation.

Comparing the influence of the EU in the two cases, the Länder were able to defend the economic interests of their “high-carbon economies” within the ETS and of their renewable energy industries until the present. However, in the case of renewable energy policies the EU has recently intensified its involvement in the federal system of co-decision. Arguing with the principles of the

common market, the EU slightly restricted the privileges of energy-intensive industries and of auto-generators and, beyond that, agreed to the federal consensus subject to structural reforms of a “REA 3.0” in 2017. On the contrary, the formal decision-making about the ETS has been transferred to the European level in order to establish a common market for emission certificates. However, due to its current ineffectiveness, the former federal compensation mechanisms within the ETS have remained intact. One potential explanation to be investigated in future studies is that within the EU multilevel system powerful subnational governments (such as NRW) can play a major role and defend their economic interests also at the EU level (cf. Keating and Hooghe, 2006, p. 273ff).

To conclude, Germany's role as an international trailblazer in climate mitigation depends to a large degree on enabling and distributive financial mechanisms in its renewable energy policies, while the capacity of its system of joint decision-making has hitherto proven limited in fostering redistributive policies against powerful regional (and industrial) interests that provoke considerable intergovernmental conflict. Future challenges in domestic climate policies will arise from their increasing embeddedness in a context of multilevel governance and their approval subject to their compliance with EU state aid and internal market rules. In a climate of economic recession in Europe, traditional hopes for the EU as a stimulator or regulator of a more effective ETS framework that could confine the share of coal and could contribute to higher energy efficiency seem to be rather unrealistic. Future success of climate policy in the German system of joint decision-making will depend on how it addresses the redistributive conflicts and the challenges of innovative interventions in the allocation of greenhouse gas emissions by its own efforts. This includes complementing the ETS effectively by national emission caps and regulatory incentives to reverse the growth of coal-based power generation.

Moreover, unlike previous climate policies the energy demandside has to be addressed more systematically. Other challenges of paramount importance are integrating the increasingly decentralized power generation based on renewables into the existing grid infrastructure and compensating fluctuations through the promotion of storage. Despite the institutional restrictions of cooperative federalism, the convergence of political parties regarding ambitious climate mitigation and renewable and nuclear energy goals, and the macroeconomic benefits, the growing national importance of and the strong lobby of low-carbon industries in Germany offer opportunities for effectively addressing regulatory challenges in climate mitigation in the future.

List of interviews Interview 1: Ministry of the Environment, North Rhine-Westphalia, Department V “Emission Control, Genetic Engineering, Climate, Energy”, July 08, 2010, Duisburg.

Interview 2: Ministry of the Economy, North Rhine-Westphalia, Department 4 “Energy, Climate Mitigation, Mining”, March 16, 2010, Düsseldorf.

Interview 3: Ministry of the Economy, Bavaria, Department VI “Energy, Mining, Raw Materials, Environmental Affairs”, March 25, 2010, Munich.

Interview 4: German Renewable Energy Federation (Bundesverband Erneuerbare Energien), March 16, 2010, Berlin.

Interview 5: German Energy Agency (Deutsche Energieagentur), May 27, 2010, Berlin.

Interview 6: German Advisory Council on the Environment (Sachverständigenrat für Umweltfragen), July 15, 2010, Berlin.

Interview 7: Federal Environment Agency, Department I 2 “Climate Mitigation and Energy”, July 15, 2010, Berlin.

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Interview 8: Association of Combined Heat and Power Generation (Bundesverband Kraft-Wärme-Kopplung), March 26, 2010, Berlin.

Interview 9: Association of German Consumer Organizations (Bundesverband Verbraucherzentralen), March 26, 2010, Berlin.

Interview 10: Federal Ministry of the Environment, Department K1 “Climate Mitigation, Environment and Energy “, July 14, 2010, Berlin.

Interview 11: German Emissions Trading Authority, Federal Environment Agency, July 14, 2010, Berlin.

Interview 12: Association of Municipal Utility Companies (Verband kommunaler Unternehmen), March 26, 2010, Berlin.

Interview 13. Ministry of the Environment, Hesse, Department II “Waste Management, Mining, Climate Mitigation- and Emission Control“, September 08, 2010, Wiesbaden.

Interview 14: RWE AG, July 08, 2010, Essen.

Interview 15: Ministry of Environment, Brandenburg, Department 53 “Climate Change, Renewable Energies, Emissions Trading”, October 10, 2013, Potsdam.

Interview 16: German Wind Energy Association, October 16, 2013, Freiburg.

Acknowledgments The authors would like to thank the Canadian Social Science and Humanities Research Council for funding under the “Allocating Canadian greenhouse gas emission reductions amongst sources and provinces: learning from Germany and the EU” project (Grant no. 865-2008-0073). We are extremely grateful for the critical and valuable comments that Douglas MacDonald, Kristine Kern, Donna Drucker, Arthur Benz, and three anonymous referees gave on an earlier version of this paper.

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