German coalition approves 2025 budget with ‘record’ climate and energy investments

Germany’s ruling coalition parties have reached an agreement on the country’s 2025 budget after months of intense negotiations that were complicated by a ruling by the country’s highest court late last year that declared billions of euros earmarked for climate and transformation projects to be illegally earmarked. At the same time, representatives of the three parties also agreed on a revised budget for 2024. Chancellor Olaf Scholz of the Social Democrats (SPD), together with Economy Minister Robert Habeck of the Green Party and Finance Minister Christian Lindner of the pro-business Free Democrats (FDP), agreed to adhere to the so-called “debt brake” that limits new government borrowing, but also jointly decided on a “growth package” to boost the crisis-plagued economy.

The package aims to use the country’s decarbonisation efforts as a lever to revive industry. It will include a wide range of measures and investments in climate and energy policy, such as a revamped support mechanism for electromobility, tax deductions for decarbonisation investments for companies, support for public transport, heating and buildings, and cutting red tape, government officials said.

The budget agreement “will provide security and stability in times of instability and uncertainty,” Scholz told reporters at a news conference. Russia’s war with Ukraine, climate change and the economic transformation towards climate neutrality, and the “full transition” of the energy system to renewable energy and hydrogen are the factors that contribute most to citizens’ uncertainty about their future, the chancellor argued. While populist forces are trying to exploit these trends by proposing simple solutions, responsible government action would have to achieve more, Scholz said. “We do not need an either-or policy, but one based on ‘as well as’,” the chancellor argued. This meant, for example, that the country must pursue “the modernization of its industry as well as affordable energy prices” or investments as well as sound budgeting, he added.

A November 2023 ruling by Germany’s highest court declared an integral part of the government’s plan to finance climate and energy programs illegal, dealing a major blow to Scholz’s coalition. But the deal did not include a legal backdoor arrangement to bypass the debt brake by declaring another state of emergency, an option that was chosen to fund the country’s coronavirus response with money outside the official state budget, a government official said. Scholz’s government initially sought to allocate some 60 billion euros of unspent money from that emergency budget to a so-called Climate and Transition Fund (CTF) over several years — an approach that the Constitutional Court said violated the terms of the emergency brake measure. Instead, the government would have to integrate long-term transformation projects into regular budget planning, the judges ruled in late 2023, leaving it with difficult decisions on how to plug the gap.

While Scholz said after the ruling that the government would press ahead with its green transformation plans despite the budget crisis, he recently defended planned austerity measures that research institutes, industry associations and environmental groups have warned would hurt the country’s energy transition. Before the end of the year, his government cut a special climate fund by 45 billion euros through 2027 to bring the budget into line with constitutionally mandated borrowing limits.