15 Nov 2023, 13:53
Benjamin Wehrmann

Court ruling forces German government to reshuffle climate policy funds worth 60 billion euros

The German Parliament
Germany's parliament: The amended budget that included the climate and transformation fund was greenlighted by MPs in early 2022. Photo: Achim Melde

A ruling by Germany’s highest court on the government’s budget planning has declared the current funding mechanism for tens of billions of euros in climate policies is unconstitutional. The judges ruled that chancellor Olaf Scholz’s government coalition cannot use funds initially dedicated to respond to the coronavirus pandemic to fill Germany’s long-term “Climate and Transformation Fund”. While existing commitments in climate action are not affected, the government will now have to find alternative ways to finance urgently needed decarbonisation and support schemes in the future. It is expected to reinforce existing conflicts about the financial footing of climate policies in the government coalition and could force Scholz to make unpopular decisions on cutting spending elsewhere and raising new taxes. [UPDATES: Reactions from energy industry groups BDEW, VKU, from environmental group DUH, economist, and climate expert council member]

The German government’s plans for funding a range of climate and energy transition policies have been thrown into turmoil after the country’s Constitutional Court found that redirecting 60 billion euros for this purpose was unconstitutional. The court (Bundesverfassungsgericht) said that transferring the money initially earmarked for the country’s coronavirus pandemic response in 2021 into the ‘Climate and Transformation Fund’ violates Germany’s constitutional limit on new state debt.

The amount will now have to be withdrawn from the fund, which the government coalition of chancellor Olaf Scholz had intended to make a key vehicle for financing climate policies over several years. “Insofar as the state has entered into obligations that it can no longer service as a result, the legislator must compensate for this through other means,” the judges from the court based in southern city Karlsruhe said.

In an immediate response to the ruling, chancellor Scholz thanked the court for providing clarity on the debt brake’s impact, adding that the government would “very closely inspect” the ruling and debate its implications. The 2024 budget negotiations in parliament planned for the day after the decision on Thursday would take place as scheduled. Scholz said his government would “swiftly amend” the Climate and Transformation Fund’s structure and also find “a temporary solution” to avoid any immediate disruption.

Finance minister Christian Lindner stressed that this had been the first time the court had decided on exceptions to the debt brake and the role of special-use funds. “We will immediately draw the consequences and initiate response measures,” Lindner said, adding that he had ordered a blocking of means for the fund in 2024, except for measures related to energy efficiency and renewable power in buildings.

Economy minister Robert Habeck stressed that “all agreed commitments will be fulfilled,” but added that no new ones could be made for the time being. He pointed out that the fund so far had been used for allowing the abolishment of Germany’s renewable power levy that lowered electricity prices for customers, providing funds for building modernisation, electric mobility and charging infrastructure as well as municipal heating decarbonisation plans.

Ruling does not put urgency of climate action policies into question

The court’s ruling does not question the necessity of climate action, which the judges in another landmark ruling from 2021 declared to be a priority and matter of inter-generational fairness. However, the latest decision did touch upon basic questions regarding state debt and the rigour of fiscal discipline. The court’s deputy head, Doris König, said earlier this year that the judges were entering “uncharted territory” regarding the constitutionality of climate policies. Scholz and members of his cabinet had visited the court the week before the ruling for “an exchange of thoughts and experiences” on the matter. Negotiations about Germany’s 2024 budget are supposed to be completed on Thursday, one day after the ruling. A spokesperson for the finance ministry contacted by Clean Energy Wire ahead of the ruling declined to comment on the expected consequences of a negative decision by the constitutional judges.

The repurposing of the 60 billion euros into the special-purpose fund retroactively amended the 2021 budget and was approved by parliament in early 2022, shortly after Scholz’s government coalition of his Social Democrats (SPD), the Green Party and the Free Democrats (FDP) came into power. Members of parliament from the conservative CDU/CSU alliance, the largest opposition faction, had litigated against the decision, arguing it would undermine the country’s so-called debt brake, which stipulates that new debt must not exceed 0.35 percent of annual economic output. The court, headed by former CDU MP Stephan Harbarth, has now supported this view: “The Second Supplementary Budget Act 2021 does not satisfy the constitutional requirements for emergency borrowing,” the judges said.

"That’s a mid-size earthquake for the coalition. Now they have to do damage control," Emanuel Richter, professor for political science at RWTH Aachen told public broadcaster Phoenix. The government now either needed to cut 60 billion in the federal budget or find new ways of financing the amount. Matthias Middelberg, deputy head of the CDU/CSU parliamentary faction, called the ruling “a major slap in the face” for the coalition. The court’s decision would affect the government’s entire budget planning, including funds for industry and other purposes.

The court gave three separate reasons for its decision, “each of which individually is sufficient to declare the Act void”. First, it argued that lawmakers had failed to establish a “factual connection” between pandemic emergency measures and climate crisis management. Second, it argued that decoupling the funds earmarked for an emergency from their initial purpose would undermine long-term budgeting principles that would have meant a “de facto unlimited use of emergency borrowing authorisations in subsequent fiscal years”. And third, the retroactive greenlighting of the 2021 budget undermined the principle of setting budgets “in advance”.

Coalition’s split on borrowing for climate action likely to become reinforced

The ruling is likely to trigger a renewed dispute among the government coalition about securing funding for a range of climate policies, including the modernisation of buildings, electric mobility, heating decarbonisation, supporting public transport, and more. The total volume of the fund was set at some 211 billion euros between 2024 and 2027, with about 57 billion euros earmarked for 2024 alone. The money needed for the climate policies can therefore no longer be provided by the special-purpose fund. Instead, the money must be sourced from the regular budget, which is already strained by a series of crisis response measures.

FDP finance minister Lindner, who earlier this year had ordered cabinet colleagues to save money in all government departments, had rejected the idea of suspending the cap on government lending for climate action purposes, arguing it should be funded through regular budgeting to keep fiscal discipline. The view of the FDP minister was in contrast to that of Green Party economy minister Robert Habeck, who questioned the debt rule in light of decarbonisation costs for industry, as well as by Scholz’s Social Democrats. 

The government must now find ways to fill the Climate and Transformation Fund, which is also fed by proceeds from emissions trading, with sufficient additional funds to carry out projected climate action measures. Earnings from emissions trading, expected to amount to about 16 billion euros in 2023, could buy the government time to reshuffle its budgeting plans accordingly and ensure that expenses which were supposed to be covered by the fund are secured otherwise. The Federal Court of Auditors (Bundesrechnungshof) in early October even criticised the German government’s for not using funds designated for climate action to their full extent.

However, if more money from the state budget is to be channelled into climate and transformation measures, this could result in spending cuts in other areas, tax increases, and a fresh debate about exceptions to the debt brake. Analyst Salomon Fiedler of Berenberg Bank in an article by news station n-tv said a possible remedy for part of the funding could be transferring it to the state-owned development bank KfW.

Borrowing limit is no longer “fit for purpose” - economist

Brigitte Knopf from the German Council of Experts on Climate Change said the judges’ decision could mean that underfunding already occurs in 2024. However, the bigger challenge would be to secure a reliable footing for climate-related expenses in the next years. “A strategy for financing the long-term transformation beyond the Climate and Transformation Fund is lacking,” Knopf said on X. 

The ruling would be “very bad” for Germany’s economy, said economist Sebastian Dullien from the University of Applied Sciences Berlin. “There is now a gap of 60 billion euros for planned, reasonable and important tasks. If the government simply cuts these expenses elsewhere in the budget, it risks deepening the current recession,” Dullien argued on X. He said the government had been wrong to declare the emergency situation that started with the pandemic is over, just ahead of Russia’s war on Ukraine and the massive impact on energy policy that this caused. However, the economist said “it’s not too late” to take action and once again declare and emergency situation that could safeguard finances for energy-related projects.

The head of German Institute for Economic Research (DIW), Marcel Fratzscher, welcomed the court’s decision, saying it would put an end to the “ever more absurd” attempts to circumvent the debt brake. On social media platform X, Fratzscher argued that the borrowing limit is no longer “fit for purpose,” as it stripped the government of tools to respond to crises and make urgently needed investments “in education, climate action, innovation and infrastructure”. He said the Climate and Transformation Fund still has enough capital to avoid immediate problems. However, the government had to suspend the debt brake “for at least another year” to provide for the promised investments.

"The government now has a responsibility to set new priorities"

Local utility association VKU said the constitutional court’s verdict is putting pressure both on climate policy funding and the federal budget in general. “The government now has a responsibility to set new priorities,” association head Ingbert Liebing said, stressing that “urgently needed” climate action measures must not be compromised. “If the recently adopted and ambitious goals made in heating transition legislation are to be met, there has to be sufficient funding and support,” the VKU head argued with a view to one of the government coalition’s most controversial and groundbreaking policy agreements of the past year.  

Energy industry group BDEW commented that the government has to make clear how climate action and renewable power expansion measures will be funded. “Today’s ruling will affect the entire climate and energy policy,” said BDEW head Kerstin Andreae. Companies needed planning security regarding state support for making investments in hydrogen, electric mobility and in other decarbonisation measures.

Sabine Nallinger, head of the NGO Stiftung KlimaWirtschaft, commented that the government was now “obliged to finance the transformation in other ways”, and had a responsibility to both future generations and to companies struggling to adapt to long-term decarbonisation goals. Nallinger stressed that the court’s previous ruling on necessary climate action had already shown that “Germany still is not doing enough to reach its climate targets”. The ruling in 2021 had prompted the government under then-chancellor Angela Merkel to pull the target year for Germany’s climate neutrality forward by five years to 2045.

Climate action measures "free of charge" must now be implemented - NGO

NGO Environmental Action Germany (DUH) said the ruling had made climate action measures “that are free of charge” ever more important. A speed limit on motorways and other roads would not cost the state any noteworthy amount of money, while a halt to climate-damaging subsidies, for example for company cars with combustion engines, could even save many billion euros per year, DUH head Jürgen Resch said. “This would lead to a cost-neutral funding of currently debated support for people willing to modernise their homes and making progress in the heating transition,” Resch argued.

NGO Greenpeace said the ruling exposed the government’s approach to fund climate policies through “parlour tricks” in budgeting. “This ruling deals a severe blow to climate protection,” said Greenpeace Germany head Martin Kaiser. He urged chancellor Scholz, who served as finance minister under chancellor Merkel in 2021, to quickly get public finances in order. “Scholz had to use his authority and “the budget’s entire wiggle room” to secure climate and transformation policies that are meant to support citizens financially on the way to climate neutrality. “Borrowing, new taxes and reducing climate-damaging subsidies must no longer be taboo,” Kaiser argued, adding that financial policy in general needed “new social-ecological balancing instruments”.

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