In November, Germany’s top court has issued a ruling which declared a key portion of the government’s climate funding to be unconstitutional. The German constitution contains a ‘debt brake’ clause limiting new debt within certain acceptable limits. German leadership was attempting to use a carve-out that provided emergency funds during the COVID-19 pandemic to fuel their climate policy. However, the court did not accept leadership’s reasoning and now there is a 60 billion Euro hole in the Government’s planned climate spending between 2024 and 2027. This funding gap doesn’t just pose an issue for the German government, but also for German industry – and US companies reliant on German production and climate progress. As Clean Energy Wire’s recent article on the subject points out:
“The court ruling would hit the country’s industry in transition harder than it is going to be an issue for climate protection, said economy minister [Robert] Habeck. ‘The core substance of the German economy is being challenged by the ruling,’ he argued. With the 60-billion-euro gap, industry modernisation was now at risk, if subsidies could not be given. ‘We would have less CO2 emissions in Germany not because we have a green industry, but because we have a less powerful industry,’ Habeck said, adding that ‘half of the world’ was subsidising industry transformation, making it extremely competitive.”
We often discuss how government policy can shape corporate climate action, but usually through the lens of increased regulation or new more ambitious national climate targets. This case gives us a view of how budget shortfalls can endanger business when promised subsidies may not materialize. This is another manifestation of political risk that companies should be aware of. Financial incentives are one of the main mechanisms by which a government can encourage action – however, it may not be wise to over-rely on subsidies which are politically unstable. This is true even in the US as we head into the presidential election season, the results of which may reduce or eliminate climate funding under the Inflation Reduction Act.
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