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1 October 2019

Fi­nanc­ing of the Cli­mate Ac­tion Pro­gramme well un­der way

The German government has got financing of the Climate Action Programme 2030 under way. Between now and 2023 alone, the German government is investing €54bn in environmentally friendly infrastructure, technologies and social equity. The Energy and Climate Fund will remain the main financing instrument.

A plant growing in a bulb
Source:  Singkham

On 2 October 2019, the German federal cabinet got financing of many of the measures agreed in the Climate Action Programme under way. The Energy and Climate Fund (ECF) continues to be the main financing instrument for the energy transition and for climate action in Germany. The ECF is a special fund set up in 2010 to finance the federal government’s energy and climate policy measures. The supplementary budget approved by the cabinet will now be debated in the German Bundestag together with the 2020 draft budget.

The supplementary budget will be used to finance the Climate Action Programme 2030, which was approved by the federal government on 25 September 2019. The Climate Action Programme 2030 is the federal government’s first binding and coordinated climate action system, designed to ensure that Germany achieves its climate action targets for 2030. The Climate Action Programme 2030 consists of four components: extensive investments and funding programmes, regulatory measures and carbon pricing as well as a binding framework which enshrines the climate targets in law – also for individual sectors (such as transport, construction and industry) – and continuously monitors whether they are being met. Where targets are missed, adjustments will be compulsory in future. It was clear from the outset: climate action doesn’t come for free. However, doing nothing would be significantly more expensive in the long term – both for the national budget and for the population at large.

The federal government is making considerable financial resources available for this purpose. Between now and 2023 alone, it is investing €54bn in new technologies, infrastructure and measures to encourage environmentally friendly behaviour. This also boosts growth potential and supplements the extensive investments in the federal budget for infrastructure, education and research. However, it goes without saying that the planned investments and funding measures go beyond 2023. Thus massive investments are also being made in Germany’s future as an innovative lead supplier and leading market for climate-friendly technologies. The federal government is also putting in place sound and socially balanced financing of climate action by making many billions of euros available to enhance social equity. After all, climate action can only succeed if companies and individuals are given the chance to switch to climate-friendly alternatives, and if steps are taken to protect social equity. The carbon price will rise slowly, allowing those on low incomes in particular to adjust their habits gradually. Lower electricity prices as well as increases to housing benefit and the commuter tax allowance will ensure that everyone will be able to cope with the required changes.

What measures are being financed by the federal government?

The total volume of €54bn earmarked between now and 2023 breaks down as follows:

  • €38.9bn from the Energy and Climate Fund (ECF), from which many of the measures are being financed, e.g.:

    • Energy-efficient retrofitting of buildings and further measures for carbon reductions in the buildings sector, including support programmes for environmentally-friendly heating systems and pumps (around €13.1bn)
    • Promotion of electric mobility, bonus for purchases of electric cars, especially below €40,000, charging infrastructure and one million charging stations as well as energy storage (€9.3bn)
    • Energy efficiency and decarbonisation in industry (€2.4bn)
  • €7.7bn through additional programmes and investments outside of the ECF, e.g.:

    • Massive funding of cycle paths (€0.9bn)
    • More equity for Deutsche Bahn AG (€4bn)
    • More money for the regional public rail transport system (€ 1.2bn)
    • More funds for preservation and sustainable management of woods and forests (€0.5bn)
    • Increase in international climate action financing (€0.6bn)
  • €2.4bn by means of fiscal promotion measures (federal government share), e.g.:

    • Reduced value-added tax rate on train tickets (approx. €1bn between now and 2023)
    • Tax incentives for retrofitting of buildings (€0.9bn between now and 2023)
  • €5.4bn for reimbursement and reduction of the financial burden on individuals:

    • Reimbursement of the levy charged on electricity consumers to promote renewable energy sources (electricity prices) (€4.9bn between now and 2023)
    • Increased commuter tax allowance (€0.4bn)
    • Increased housing benefit (€ 0.2bn)

The fiscal measures and reimbursement of private citizens will be implemented through future legislation. However, in the same way as the ECF, they are already taken into account in budgetary planning. These extensive investments and funding measures are particularly important at the beginning of the programme in order to allow both individuals and companies to behave in a climate-friendly manner. The aim is to make climate-friendly alternatives attractive (for example by promoting local public transport, rail travel and cycling) and make it affordable for the majority to acquire climate-friendly products (e.g. a new heating system or an electric car).

How is the federal government financing these measures?

The federal government will implement the comprehensive climate package without having to incur any new debt. For the most part, the measures are being financed by means of:

  • Existing European emissions trading: revenues from the European Emissions Trading System (ETS) are already the main source of revenue of the ECF. The ETS will continue to play an important role in financing climate action measures.
  • To supplement emissions trading revenues, the federal government already provides a government subsidy for ECF programmes. This will continue to be the case. Besides this the existing reserve in the ECF will be used for the new programmes.
  • Carbon pricing: The federal government is also introducing carbon pricing in the transport and heating sectors, which are not currently part of the European Emissions Trading System. The aim is to incentivise a reduction of carbon emissions from heating and motor vehicles and to encourage innovations in low-carbon technologies. Carbon pricing is not intended to generate public revenue for other purposes. The additional government revenue will therefore be reinvested in climate action or paid back to taxpayers. Emissions certificates will be issued at a moderate fixed price of €10 per tonne of CO2 in 2021, rising gradually to €35 per tonne of CO2 in 2025. The fixed price allows planning certainty and means that the burden can be controlled. In 2026, an auction of certificates will be held where the price will range from a minimum of €35 per tonne of CO2 to a maximum of €60 per tonne of CO2. In 2025, it will be determined to what extent maximum and minimum prices for the period starting in 2027 are appropriate and necessary, on the basis of the regulatory experience that will have been gained with this instrument by then. Furthermore, the number of emission allowances will be capped starting in 2026. This cap will be based on the stipulated climate targets and will be reduced from year to year. This will ensure that the 2030 targets for these sectors are met. The carbon price will increase at a moderate rate to begin with, because a sudden drastic increase would hardly have the desired incentive effect, as many people do not have any alternatives or simply would not be able to afford them (new heating system or a new electric car). Moreover, such an increase would affect low and average earners in particular, and would thus be socially unjust.
  • Systematic CO2-based reform of motor vehicle tax: The federal government will align motor vehicle tax more closely with CO2 emissions. This is expected to lead to stronger incentives to buy cars with lower-emission and emissions-free engines. For new registrations from 1 January 2021 onwards, the main basis for assessment of the tax will be carbon emissions per km. In addition, the tax will be increased in two emission classes above 95 g of CO2/km. The resulting additional revenue will be used for the climate package.
  • In addition, the federal government will submit legislation to increase aviation tax with effect from 1 April 2020. At the same time, value-added tax on rail tickets for intercity routes will be reduced from 19% to the reduced rate of 7%. From 2023 onwards, a carbon surcharge on the heavy goods vehicle toll is planned.