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18 August 2021

Public Finances

Climate and environmental goals at the heart of the German government’s future-oriented subsidy policy

Federal cabinet adopts 28th Subsidy Report

  • Number 22

The federal cabinet today adopted the “Report by the German Government on Trends in Federal Financial Assistance and Tax Benefits during the Period from 2019 to 2022” (28th Subsidy Report). The Subsidy Report clearly shows that subsidy policy is an integral part of the federal government's forward-looking financial policy. By setting clear goals in high-priority areas, subsidy-funded measures provide real impetus in terms of driving climate action and environmental protection, boosting the economy’s capacity for the future, also in terms of innovation, overcoming the economic fallout from the pandemic, and promoting social equity.

Subsidies promote climate action and environmental protection

The 28th Subsidy Report is focused on the measures to reach the German government’s goals on climate action and environmental protection. For example, the decisions on reaching the climate goals for 2030 and the immediate climate action programme will receive funding commensurate with their prioritised importance. In these areas, federal subsidies in the form of financial assistance and tax benefits are set to climb from €24.6 billion in 2019 to €47.2 billion in 2022.

This increase is driven mainly by financial assistance, which has been upped by approximately €19.4 billion, primarily on the basis of the German government’s decisions on reaching the 2030 climate goals and the immediate climate action programme for 2022. This means that two thirds of financial assistance will be dedicated to climate-related and environmental measures. For 2021, for example, financial assistance with an estimated total financing volume of €16.2 billion was directly linked to the environmental and climate goals set out in the German Sustainable Development Strategy (Deutsche Nachhaltigkeitsstrategie).

The German government’s subsidy policy is based on the principle that subsidies should only be used as temporary assistance for transitional periods of adaptation. The newly adopted climate action measures follow this principle. Initially, incentives will be provided to promote climate-friendly behaviour and investments; in time, however, these incentives will be accompanied, and in part also replaced, by clear rules. The most important new financial assistance includes the Federal Funding for Energy-Efficient Buildings and the grants for the purchase of commercial vehicles and buses with climate-friendly engines. In addition, the grants for purchasing electric vehicles and for expanding the charging infrastructure were increased.

Federal tax benefits are projected to rise from €16.3 billion in 2019 to €19.6 billion in 2022. This is the result, among other things, of the increased uptake of tax benefits for electric vehicles and plug-in hybrid electric vehicles, and of the temporary reduction of VAT for restaurant and catering services, which applies until the end of 2022. This measure also contributes to overcoming some of the economic fallout of the pandemic.

As well as pushing forward with climate and environmental action, the German government is making the economy more future-proof and innovative and promoting social equality. Other funding priorities include digitalisation and housing construction. With the introduction of a tax allowance for research, an additional €1.0 billion will flow into research and development in 2022. In the area of digitalisation, funding for the expansion of broadband and gigabit networks and for nationwide mobile communications coverage is being increased from €285m in 2019 to a planned €1.58 billion in 2022. There will be a substantial increase in federal subsidies for housing during the reporting period, from €2.8 billion in 2019 to a projected €8.3 billion in 2022. This is being driven primarily by additional funding for energy efficiency and renewable energy measures in the building sector and by federal funding for social housing.

Ensuring targeted climate action and environmental protection by phasing out harmful subsidies

Developing an environmentally and climate-friendly tax and social security system also requires avoiding subsidies that have an adverse impact on the environment and climate. In its immediate climate action programme for 2022, the federal government has therefore decided that tax benefits which have a detrimental effect on the environment and climate will be reviewed on the basis of available evaluation results. It will also be submitting a proposal for the comprehensive reform of fees, surcharges, levies and taxes in the energy system. As part of a sustainability impact assessment, the subsidies – old and new – will be examined from a variety of sustainability related perspectives on the basis of the German Sustainable Development Strategy’s system of targets and indicators.

Scope and purpose of the Subsidy Report

The purpose of the Subsidy Report is to provide the Bundestag and Bundesrat with relevant information during the drawing up of the budget. The 28th Subsidy Report therefore only takes into account those measures that are still relevant for the 2022 federal budget. The majority of the government measures to mitigate the impact of the coronavirus pandemic were temporary and have mostly expired. The federal government’s €400 million relief package for flood-hit regions, which was approved by the federal cabinet on 21 July 2021, has also been categorised as a temporary measure.