13 Dec 2023, 14:38
Carolina Kyllmann Benjamin Wehrmann

Scholz’s government cuts climate fund by 45 bln euros by 2027 in response to debt brake ruling

“We will have to use significantly less money to meet our goals”: Chancellor Scholz announcing the government's agreement on the 2024 budget. Photo: Bundesregierung (screenshot)

Germany will earmark billions of euros less for climate and transformation projects every year until 2027 in order to make the government budget comply with constitutionally enshrined limits on borrowing. One month after a seminal ruling by the country’s highest court on the so-called debt brake forced the coalition to reshuffle its financial planning, chancellor Olaf Scholz announced that several “unpleasant but necessary” steps will ensure that the core aims of his government’s climate and industry transformation policies will be secured. Besides making cuts in a wide range of areas, the coalition said it will return to a higher level of carbon pricing and tackle environmentally damaging subsidies to help it consolidate its reformed budgeting plans. While industry, economists and environmental NGOs welcomed the clarity an agreement finally delivered, reactions were mixed. [UPDATES reactions to government's budget deal, details on savings measures]

The German coalition government has agreed on a budget for 2024 that takes account of a momentous court ruling a month earlier, which declared 60 billion euros earmarked for climate and transformation projects as being booked unlawfully. Chancellor Olaf Scholz said the agreement means that Germany will stick to its key target of delivering a climate neutral transformation of the economy but added that “we will have to use significantly less money to meet our goals.” Scholz said the coalition parties had agreed on priorities in the budget as well as on spending cuts and revenue increases to meet budgeting rules, adding that this had been “unpleasant but necessary.”

The country’s main financial instrument for climate action projects, the Climate and Transformation Fund (CTF), will be endowed with some 12 billion euros less in 2024 and with 45 billion euros less until 2027, the chancellor said. However, he argued that the fund would still have “a very high total volume” of 160 billion euros, meaning that central transformation projects will be covered.

The German government's announced cut to the CTF coincided with a deal reached on the final day of the UN climate conference COP28 in Dubai, which Germany and other EU governments welcomed for heralding "the end of the fossil fuel era."

The agreement made in the night on Wednesday (13 December) between Scholz’s Social Democrats (SPD), the Green Party of economy minister Robert Habeck and the pro-business Free Democrats (FDP) of finance minister Christian Lindner followed upon weeks of intense negotiations about how to reshuffle the government’s budget. The coalition’s negotiators faced the challenge of prioritising the most important expenses in the overall budget without having to pull the plug on key climate action measures promised during the past years.

Scholz said that agreeing on the 2024 budget had been made possible through a combination of reducing climate-damaging subsidies, cuts to support programmes and reduced spending in different government departments. Amongst other things, the government will introduce a tax on aviation fuel for domestic flights as well as a tax on plastics, an economy ministry document seen by Clean Energy Wire said.

Besides its determination to stick to its climate action and industry transformation ambitions, Germany would also continue to deliver necessary financial assistance to Ukraine in its defence against Russia’s invasion and will not enforce cuts that pose a danger to social cohesion, the chancellor added.

"Central parts" of climate and transformation policies will not be eroded by budget reshuffling, econ min says

The constitutional court’s ruling on 15 November prohibited the government from borrowing more money than allowed under the country’s so-called debt brake by rededicating funds left over from the country’s coronavirus response programmes from 2021. This dealt a heavy blow to the financial planning of Scholz’s coalition and triggered a noisy debate about the necessary consequences, including cuts to social security programmes, tax increases, stopping unnecessary or environmentally damaging subsidies across the board, and also suspending or reforming the debt brake rule itself.

While the ruling on the 60 billion euros planned for the CTF affected financial planning over several years, the government faced the immediate challenge of deciding on a budget for the next year only. The treasury had determined the gap in funding for 2024 to be 17 billion euros.

Economy minister Habeck said the coalition had agreed on a “major reshuffling” and saving of funds in the CTF, resulting in a migration of some of the planned projects into other financing schemes, for example those dealing with the country’s national railway modernisation. Habeck stressed that “central parts” of the government’s climate and transformation agenda would be safeguarded within the CTF framework.

These include supporting the buildup of a hydrogen infrastructure through programmes such as the EU IPCEI scheme, sustainable industry transformation through carbon contracts for difference, lower prices for power customers prices through the abolished renewables levy and a transition in the heating sector, even though "the speed here could be reduced somewhat," the economy ministry's document said.

Regarding envisaged spending cuts, Habeck said that these will include an earlier end to Germany’s electric vehicle support as well as to some funding earmarked for solar PV expansion -- a decision that “hurts me personally.”

Also, finance minister Lindner insisted that the CTF would continue to have “an enormous volume” for climate action funding despite the cut of tens of billions of euros over the next years. The government hopes that its investments in key climate and transformation projects will be leveraged by subsequent private investments, thereby significantly topping up public funding commitments. Lindner said the government had agreed on abolishing the country’s electricity tax, worth about 3 billion euros, by doing away with environmentally harmful subsidies.

At the same time, he said the government planned to increase the revenues into the CTF by raising the price of carbon emissions in transport and buildings to 45 euros per tonne of CO2-equivalents in 2024, instead of the planned increase to 40 euros and up from the current 30 euros. He added that the government did not decide on lowering the standards in social security and support programmes, but would aim to increase efforts that these deliver “on target.”

Clarity welcomed, otherwise mixed reactions from industry, environmental NGOs, economist, politics

Green Party parliamentary group leaders Britta Haßelmann and Katharina Dröge applauded the agreement on the 2024 budget and said a good solution had been found. In the medium term, however, money to drive forward the modernisation of the country, secure international competitiveness and protect the climate," would have to be found elsewhere, they wrote in a statement. "We therefore continue to campaign for a reform of the debt brake."

The Institute for Economic Research (ifo) welcomed the agreement as a step in the right direction, but shared the concern on whether the necessary level of investment could also be made in the coming years. "It is to be welcomed that the German government has not taken the easy route of declaring a budget emergency, but has cut spending, especially subsidies, and also increased environmental taxes such as the CO2 price somewhat more," ifo head Clemens Fuest said.

The German Economic Institute (IW) was less optimistic, saying essential investments and long-term solution for future budgets fell by the wayside in the agreement process. The announced 45-billion-dollar reduction to the CTF "casts doubt on whether the project can succeed," the institute wrote. It called for a reform of the debt brake and long-term planning security for companies.

Through the increase in the CO2 price, as well as the cancellation of subsidies for greed fees, consumer prices would increase significantly, price comparison website check24 warned. "Unfortunately, the cuts agreed today will lead to increases in energy prices and place an additional burden on households, trade and industry in the coming year" through a domino effect triggered by the discontinuation of the transmission grid fee subsidy, Kerstin Andreae, head of the utility association BDEW, said.

Similarly, Industry federation BDI called the coalition’s deal "a tough austerity package that is going to put a burden on everyone." While it created some planning security for the economy in the short to medium run, both companies and customers would be hit hard by the envisaged savings measures, argued BDI head Siegfried Russwurm. The increase in the national CO2 price and expected increase in grid fees would let Germany’s “already high” energy costs rise further and hurt German companies’ competitiveness, the lobby group head said. He argued that the agreement ultimately would make Germany’s economic recovery harder than it already was.

The German Chemicals Industry Association (VCI) welcomed the fact that the agreement delivered clarity, but warned that there's no reason to sound the all-clear yet. "The green restructuring of the economy must not be sacrificed to the tight budget," VCI managing director Wolfgang Große Entrup said. The problem posed by energy prices had not been solved, he added.

Greenpeace criticised the fact that the special climate fund would see cuts of 12 billion euros, but that climate damaging subsidies would only be cancelled to a small extent. "The harmful company car privilege will not be abolished and diesel fuel will continue to be subsidised to the tune of billions - this is hampering ecological modernisation," Bastian Neuwirth, economist at the NGO, said. Renewable energy association BEE echoed this: "A larger volume than three billion euros would have been possible here," the lobby group's head Simone Peter said.

All texts created by the Clean Energy Wire are available under a “Creative Commons Attribution 4.0 International Licence (CC BY 4.0)” . They can be copied, shared and made publicly accessible by users so long as they give appropriate credit, provide a link to the license, and indicate if changes were made.
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