Can Germany Go Climate-Neutral by 2045?

A yearly public expenditure of around 46 billion euro would be enough to allow Germany to attain zero-carbon status by 2045 (this would amount to 1.3 percent of GDP or 6.3 percent of gross domestic investment).

When faced with the dramatic worsening of the climate crisis, this figure sounds like next to nothing. However, in view of the current multi-billion-euro budgetary hole due to last December’s German constitutional court ruling — which also has implications for climate protection — the amount seems to actually be more than just peanuts.

Where Will the Money Come From, and Where Will It Be Spent?

In 2021, scientists Tom Krebs and Janik Steitz, working for the think-tank Agora Energiewende, collated estimates for all the additional construction costs that the German federal government, states, and municipalities would need to bear by 2030 to make Germany climate-neutral by 2045.

Firstly, this would entail each level of government providing the necessary funding for climate protection within their own jurisdictions. It would also mean raising the necessary funds to provide sufficient subsidies for private investment in climate protection. The grand total of around 46 billion euro per year refers only to public funds, not to private investment initiatives such as renovating homes, or the green transformation of industry. This latter point relates to, for instance, programmes from the state-owned KfW development bank that provide support for energy-efficient renovations of private buildings, or state subsidies promoting the use of green hydrogen in steelworks until the price becomes more competitive.

The authors note in their report that the necessary amount of private investment for such industrial transformation is not included in this total — the final sum could amount to many times the original figure, if subsidies and incentives are taken into account.

The annual sum of 46 billion, which the Agora study predicts will be the amount needed, and which would equate to 460 billion euro in the period of 2021–30, is made up of a series of smaller outlays.

Since the annual sum of 46 billion is to come out of the public purse, it would be financed through Germany’s Kernhaushalt (the federal government’s core budget), or through dedicated funds such as the federal government’s Climate and Transformation Fund (KTF). This fund is not directly part of the federal budget, as it involves earmarking funds for specific purposes — unlike the regular budget, where money can be directed wherever it is needed.

The KTF is primarily funded by revenue from carbon pricing. Part of this revenue is funds obtained via auctioning off emission allowances for the energy and heavy industry sectors in the EU Emissions Trading System (EU ETS), to which Germany is entitled to a portion. Carbon pricing revenue also includes all funds obtained through the Fuel Emissions Trading Act (BEHG) via domestic emissions trading in the construction and heating sectors. In the past, when CO2 prices were low, the core budget injected an additional multi-billion-euro subsidy into the KTF so that it was better able to fulfil its remit: the integrated financing of climate protection measures.

Better, however, was not good enough, because the sums afforded to the KTF (then called the Energy and Climate Fund, or EKF) were far too small to get even halfway to reaching the necessary funds for energy transformation. The current government increased spending on the programme to the tune of several billion euro (for more on that, see below). This increase, however, considerably exceeded revenues obtained via emissions trading, despite carbon prices having risen in the meantime. Any gaps in funding were to be filled not by the core budget, but rather by unused lines of credit from another special fund, the Economic Stabilization Fund (WSF), put together to manage the COVID-19 crisis. Germany’s constitutional court, however, struck down this plan.

The Christian Democrats (CDU), as the plaintiff against the federal government, may have celebrated a little too soon, as the judgement also puts in place new measures that could scupper special funds like the KTF or WSF at the state level (including in states governed by the CDU or its sister party, the CSU). These measures could prevent such credit-based climate protection financing, which circumvents the actual state budgets, and whose funds then get distributed to where they are needed in the municipalities, or are used by individual councils to reduce greenhouse gas emissions in the local area.

The Sum of Many Parts

The annual sum of 46 billion, which the Agora study predicts will be the amount needed, and which would equate to 460 billion euro in the period of 2021–30, is made up of a series of smaller outlays.

• First, there is federal spending on measures aiming to reduce carbon emissions on federal property, which, according to the Agora figures, would amount to approximately 90 billion euro by 2030.
• A second portion covers the 170 billion euro allocated for municipalities to spend on climate protection measures in cities and local councils.
• Third, by the end of the decade, 200 billion euro should have been made available to promote private investment in climate protection. This should be paid out by the federal government, with schemes such as the aforementioned energy-efficiency building renovations or the use of hydrogen in industry.

However, Agora has not yet provided a complete picture when it comes to all the areas requiring financing. The study predicts that the expansion of electricity-transmission and -distribution networks will play a major role in the energy and industrial sectors’ successful climate transition. To avoid a spike in electricity fees, part of this expansion will need to be financed through public funds. Due to regulatory uncertainty, it is hard to put a concrete figure on how high the associated costs will eventually be.

No Financial Cushion from the Economic Stabilization Fund

This is where the Agora study has to face reality: during the 2022–23 energy crisis, even just the additional effort towards stabilizing the network meant that grid operators faced extremely high additional costs around the extra-high-voltage network. A sum of 5.5 billion euro was earmarked as a financial cushion by the WSF, now rendered void by the constitutional court ruling. As a consequence, electricity customers in this network had to pay 6.43 cents per kilowatt-hour in 2023 — more than double the cost in 2022.

It was these spikes in price that the governing coalition wanted to prevent, faced with the huge increase in electricity prices during the energy crisis. In 2022, the government went so far as to take preventative measures and abolish the EEG apportionment (from Germany’s EEG, or Renewable Energy Sources Act, also known as the “green electricity apportionment”). Subsidies for green energy providers have been entirely publicly funded since July 2022, instead of being paid for through the electricity bills of households and businesses, as had been the case previously. This money now comes out of the KTF.

Should the federal government aim to retrofit heavy goods vehicles to use hydrogen fuel and establish a network of filling stations for hydrogen-powered cars, additional costs would arise.

Yet this item is only included in the Agora calculation with the comparatively low cost (10 billion euro — equivalent to 1 billion per year) estimated for new installations in the period 2021–30, to account for market variations in electricity prices. This is because the EEG apportionment was still being paid for by consumers when the study was put together. That guaranteed financing to pay for the costs of older wind and solar installations, which were then 13 times more expensive. With the EEG now wholly financed through public funds, the 13 billion required each year must be reallocated towards state support for private investment.

Reckoning with Many Unknown Factors

Technically, this happens through the Economic Stabilization Fund (KTF), which is likely to remain the case, despite Christian Lindner’s zealous spending cuts. This means that the initial 46 billion euro per year for this item alone will balloon to 59 billion in required financing.

This figure, the study points out, also fails to include spending on promoting ecological transformation in the agriculture, land use, and waste management sectors. For the time being, such funds cannot be calculated.

Should the federal government aim to retrofit heavy goods vehicles to use hydrogen fuel and establish a network of filling stations for hydrogen-powered cars, additional costs would arise. Because experts in these sectors by no means recommend hydrogen (extremely inefficient and more expensive than powering electric vehicles), it is highly unlikely that there will be any additional costs incurred here — unless the Free Democrats (FDP), abandoning conventional economic wisdom, opts to throw money away here too.

A gap in the Agora study that would certainly need to be filled is the cost of future measures to adapt to changing climates, as well as for any environmental damage that occurs. While Agora does mention the issue, it found too few reliable studies with which it could calculate the necessary sums that would need to be raised. It should, however, be clear that this will cost the federal government, states, and municipalities tens of billions of euro. Just dealing with the flood damage after the Ahr Valley catastrophe cost the federal government and states 30 billion.

Also missing from the 46 billion figure, and unmentioned in the study, are provisions which could offer a stronger, more socially directed cushion for the transformation than previously achieved.

Those with high incomes and greater wealth must make a considerably larger contribution in order to secure the complete decarbonization of our society by 2045.

Indeed, many of the measures under consideration have social components (even if these are imprecise and sometimes disproportionately benefit the wealthy), such as grants for energy-efficient building renovation, or the removal of the EEG apportionment. In the face of high energy prices (even if they have since sunk a little), elements such as the Klimageld (“climate bonus”) should finally be paid out to households.

This was, after all, part of the coalition agreement, and it is foreseen that CO2 prices will continue to increase. The Federation of German Consumer Organizations calculates this amount to total around 11.4 billion euro per year, resulting in a rebate of 139 euro per head.

What’s more, if we look at the situation through the lens of international climate justice, there is a duty to increase payments considerably for the Global South, as it is the area most affected by climate change. At least 8 billion euro each year, instead of the previous 6.4 billion, would have to be made available by Germany, according to Climate Alliance Germany.

Costs Could Double

A rough estimate of the cost of the aforementioned additional funding comes to an additional 20–30 billion euro. Thus, we reach a figure in the realm of 80–90 billion euro, an average yearly cost that would need to be shouldered by the state if it is to meet its goals in providing the funding for an ecological transformation of society.

Of that amount, at least 50–60 billion euro would need to be covered by the German government. After all, it is not only federal investment and international obligations that fall within its remit, but also all the funding programmes for private investment (the third item in the bulleted list above). Furthermore — as the Agora authors also emphasize — a significant portion of the additional municipal investments are the responsibility of the federal government.

The original spending plan for the KTF amounted to 57.6 billion euro in 2024 and 40 billion in 2027. While it should be noted that not all climate spending is included in the KTF (although there are questionable items like excessive electricity subsidies for companies), this original plan did not significantly shift from the 50–60 billion mark — the average figure, however, was markedly less. The current cuts to the KTF of roughly 30 billion euro in the period up to 2027 will only exacerbate the funding gap.

The fundamentally unresolved problem is where the necessary federal funds are to come from in the future. This problem is currently coming to the fore in budget reallocations and cuts in the aftermath of the constitutional court’s ruling, which has negative implications for social programmes and climate protection. Above all, the financial gap — amounting to many tens of billions of euro each year in climate spending alone — will continue to widen.

There are two routes to closing the gap. One is to lift the “debt brake”, which has needlessly restricted the scope of public sector action — as our comrade Axel Troost, whom we lost far too soon, documented on many occasions. But even for him, taking out loans was not a means of producing money out of thin air, or not without disrupting economic relations.

Which brings us to the second route: to use an old-fashioned term which is nevertheless appropriate, “top-down wealth redistribution”. Those with high incomes and greater wealth must make a considerably larger contribution in order to secure the complete decarbonization of our society by 2045, at the latest.

Translated by Rowan Coupland and Anna Dinwoodie for Gegensatz Translation Collective.