How Germany's budget crisis affects its green ambitions
Germany, Europe's largest economy and a global leader in renewable energy, is facing a budget crisis that could undermine its efforts to fight climate change and modernize its infrastructure. The crisis was triggered by a court ruling that annulled the government's decision to use 60 billion euros ($65 billion) of pandemic relief funds for green projects. The ruling left a 17 billion-euro hole in the 2024 budget and forced the government to cut some subsidies and spending, including those for farmers and electric car buyers.
One of the most controversial measures approved by the parliament's lower house on Friday was a reduction in fuel subsidies for farmers, which sparked angry protests across the country. The government initially planned to abolish a car tax exemption for farming vehicles and tax breaks on diesel used in agriculture, but later compromised by keeping the car tax exemption and phasing out the diesel tax breaks over three years. The farmers argued that the cuts would make their businesses unviable and increase food prices for consumers.
The government also increased the tax on plane tickets and the levy on carbon dioxide emissions from fuel, which had already been raised more than expected last month. These measures are aimed at discouraging fossil fuel consumption and encouraging low-carbon alternatives, but they also increase the cost of living and mobility for many Germans, especially in rural areas.
The budget crisis also puts pressure on the government's plans to support Ukraine, which is facing a military threat from Russia and an energy crisis due to high gas prices. The government had pledged to increase its financial and humanitarian aid to Ukraine, as well as to help it diversify its energy sources and reduce its dependence on Russian gas. However, some lawmakers have questioned whether Germany can afford to be generous with its neighbors when it has to tighten its own belt.
The budget crisis also raises doubts about the government's ability to meet its ambitious climate targets, which include reducing greenhouse gas emissions by 65% by 2030 and reaching net-zero emissions by 2045. To achieve these goals, Germany needs to invest heavily in renewable energy, energy efficiency, electric mobility, digitalization and innovation. However, the court ruling limits the government's borrowing capacity and forces it to find new sources of revenue or make further cuts in other areas.
One of the sectors that could suffer from the budget constraints is solar power, which has been booming in Germany thanks to generous feed-in tariffs that guarantee a fixed price for electricity produced from photovoltaic panels. The government has already announced that it will accelerate the next round of cuts in solar subsidies by three months to April 1, after a record-breaking expansion of solar power in 2023. The cuts could range from 20% to 30%, depending on the size and type of installation. The government argues that the subsidies are no longer necessary as solar power becomes more competitive with conventional sources, but some industry representatives warn that the cuts could slow down the growth of solar power and jeopardize jobs and innovation.
The budget crisis poses a major challenge for Chancellor Olaf Scholz, who took office in December after leading a three-party coalition of Social Democrats, Greens and Free Democrats. Scholz, who was previously finance minister, has promised to balance fiscal responsibility with social justice and ecological transformation. However, he faces opposition from his own coalition partners, as well as from other parties and interest groups, over how to distribute the costs and benefits of his agenda.
The budget crisis is not yet over, as the parliament's upper house, which represents Germany's 16 state governments, still has to approve the cost-cutting measures. The upper house is expected to hold its next meeting on March 22, but it could raise objections or refer the plan to a committee that resolves disputes between the two houses. If that happens, Scholz could face further delays and complications in implementing his vision for Germany's future.