German climate spending hangs in the balance after constitutional court ruling
German federal constitutional court rules that government funding of Climate and Transition Fund was unconstitutional
On 15 November the “Bundesverfassungsgericht” (the German federal constitutional court) ruled that the current coalition government comprising the Social Democrats, the Greens and the Free Liberals had acted unconstitutionally when it re-allocated emerging funding raised during the Covid pandemic into the “Klima und Transformations Fonds” (climate and transformation fund).
The re-allocation was unconstitutional as the government’s debt brake, which is enshrined in the constitution, can only be suspended in times of emergency – as was the case for example during the Covid pandemic. Re-allocating unused funds raised during an emergency for other unrelated purposes later would circumvent the debt brake.
Under normal circumstances the debt brake limits the central government deficit to a maximum of 0.35% of GDP.
The government remains committed to its climate pledges but how to pay for them?
The ruling represents a major setback for the German government which had firmly planned to use the reallocated funds amounting to €60bn for climate and transition projects. In terms of climate initiatives, the fund was meant to support:
- Improving energy efficiency in residential housing;
- Decarbonising industry;
- Rolling out renewable energy;
- Transitioning to EV mobility;
- Developing an internationally competitive hydrogen sector.
Making up the funding shortfall will be difficult. The government could declare another emergency (for example to deal with the climate crisis) to run a higher fiscal deficit than prescribed by the debt brake. Such a decision would probably be challenged in the constitutional court as well.
Alternatively the government could cut back its climate ambitions but Robert Habeck, the Economics and climate minister, has stressed that the government remains committed to its climate and transition projects.
In the absence of another emergency the government must then either raise revenue and/or cut other federal spending.
The government is currently considering its options. From the outset, none of the available options appear to be palatable for all the coalition partners.
The situation is made worse by the fact that the opposition Christian Democrats, who took the case to the constitutional court, have already declared that they might also challenge the government’s “Doppelwumms” of fiscal stimulus in the wake of the Russian invasion of Ukraine in early 2022. As with the COVID emergency funds, unused funds might also not be re-allocated for other purposes.
The court ruling could be a major setback for the government’s climate ambitions
The court ruling comes only months after the government’s deeply unpopular “Gebäudeenergiegesetz” (residential heating law).
By re-allocating emergency funding for climate projects, the government so far managed to shield the general population from the true cost of the energy transition. This will no longer be possible, with the electorate either hit by a higher tax burden or having to accept lower spending elsewhere to finance the climate pledges.
This doesn’t make the business environment in Germany any easier: Businesses in the sectors relevant to the energy transition might no longer get all the government support they had hoped for. Similarly, financial incentives to households to make their homes more energy efficient might need to be cut back or pushed into the future. Spending cuts elsewhere could further dampen already weak domestic demand – according to the International Monetary Fund, Germany is one of only a handful of countries predicted to experience negative economic growth this year.
Whatever options the government will choose, it is likely that the court ruling will slow down Germany’s energy transition in the years ahead.
Dr. Frank Eich