Germany's Finance Ministry plans to shift billions of euros from the state Climate and Transformation Fund (KTF) into the core budget, to plug the “holes” in public finances caused by higher defence spending and sluggish economic growth.
The decision marks a significant turning point in Germany's fiscal policy. The Climate and Transformation Fund is the main instrument for Germany's shift to green energy and climate neutrality, yet in 2026 the German government is facing a serious EUR 34 billion budget deficit for the coming year. This is being driven by two main factors: rapidly rising defence spending and persistently weak economic growth. To rescue the core budget, Finance Minister Lars Klingbeil has opted to cut climate funding, a move that has already drawn sharp criticism from NGOs and industry representatives over the unpredictability it creates for long-term policy.
The causes of Germany's budget deficit
Three main factors have driven the EUR 34 billion deficit in the draft 2027 budget. The first and largest is the sharp rise in spending on defence and rearmament. Following Russia's invasion of Ukraine, Germany has embarked on an ambitious modernisation of its armed forces. The federal defence budget will grow by 33% in 2027, reaching around EUR 110 billion, up from EUR 82.2 billion in 2026. The stagnating economy is also having a major impact, still suffering from slow growth and global shocks, including the rise in energy prices triggered by the war with Iran. This means tax revenue is growing at barely half the pace of state spending. The “debt brake”, or Schuldenbremse, written into Germany's constitution strictly limits new borrowing. Although exceptions exist for defence spending, gaps in the core budget cannot simply be covered with new debt, forcing the government to look for free funds elsewhere.
How Germany's Climate and Transformation Fund operates
The Climate and Transformation Fund (Klima- und Transformationsfonds, KTF) is a dedicated fund set up by the German government that operates outside the core state budget and serves as the main driver of the shift to a green economy. The fund does not draw on general taxation but on specific sources. Its main income comes from CO₂ levies, for example on transport and heating, and from auctions under the European Emissions Trading System (ETS). There are also permanent earmarked grants from Germany's EUR 500 billion special fund for infrastructure and climate-neutrality support.
By law, KTF funds are earmarked for specific sustainability programmes only. The building energy-efficiency programme supports households installing heat pumps and insulating homes, with EUR 44 billion earmarked for it by 2030. The second programme covers electromobility – grants for buying electric cars and building charging networks – worth EUR 14 billion by 2030. The third programme funds industrial decarbonisation, helping heavy industry, such as steelmaking, switch to hydrogen technologies.
The fund's core principle is targeted use of the money: the sums companies pay for pollution flow back, in the form of green subsidies, to those same companies and to households. Diverting these funds into the core budget to cover general spending, such as defence, breaks that principle and creates long-term instability across the entire green-energy sector.
Billions of euros moving from the climate fund to the core budget
By trimming support programmes such as those for installing heat pumps, KTF spending in the 2027 budget will be cut by EUR 3.4 billion, according to the newspaper Handelsblatt. Through several successive rounds of cuts, the government plans to save up to EUR 13 billion by 2030, which will be redirected to the core budget. Projects already agreed will not be affected by these cuts.
Despite cuts to individual programmes, the fund's overall spending will rise to EUR 40.3 billion in 2027 – three billion more than in 2026. The KTF remains Germany's main financial instrument for funding large-scale energy-transition and climate-neutrality projects, including heating, electric vehicles and industrial decarbonisation.
The energy-industry association BDEW has warned that some of the planned cuts will hold back progress on the transition, while redirecting money earmarked for climate spending creates long-term uncertainty about the funding system. “The planned diversion of revenue from European emissions trading is questionable,” says BDEW head Kerstin Andreae. “At the same time, the KTF is supposed to receive money from the special fund for infrastructure and climate neutrality. Because of this shift, the targeted use of emissions-trading revenue and of the special fund is no longer traceable,” Andreae explained.
NGOs and industry representatives had already criticised Finance Minister Klingbeil's plans to use these funds to patch Germany's strained budget earlier in the week, when the planned 2027 KTF cuts were estimated at just EUR 2.7 billion. The Finance Ministry maintains that the cuts are necessary to close the EUR 34 billion deficit facing the country as soon as next year, driven in part by Germany's growing defence spending and persistently weak economic growth. Germany's decision to shift billions of euros from the KTF into the core budget creates substantial risks and obstacles for the country's goal of achieving full climate neutrality by 2045. Although the government insists the fund remains solid, economists and environmental organisations such as GermanZero are once again warning of “serious consequences”.
The transition for households and transport is being held back
For Germany to reach net-zero emissions by 2045, the European Parliament estimates that around EUR 5 trillion is needed in total, of which at least EUR 500 billion must come from public funding. Stripping EUR 13 billion from the KTF by 2030 widens that public-investment gap still further, increasing the burden on the coming decades. Because the government chose to leave industrial subsidies untouched, in order to preserve companies' competitiveness during the crisis, the main cuts fall directly on households.
Although EUR 44 billion has been earmarked for support up to 2030, the level of subsidy will shrink by nearly two billion from 2028 onwards. The maximum level of co-financing available to households will be gradually reduced, which may prompt many to put off switching to greener heating. Support for buying electric vehicles and environmentally friendly transport is being cut by 10% (around EUR 400 million) as early as 2027. This will slow decarbonisation in the transport sector, which is already behind schedule.
Long-term stability is being lost
The largest green projects require years of planning. BDEW head Kerstin Andreae stresses that by starting to move emissions-allowance revenue freely into the general budget, the state creates long-term unpredictability. Private investors and companies can no longer confidently rely on the support the state has promised, which is prompting them to shelve green projects.
Critics point to a worrying trend: the KTF was meant to fund the transition and the shift to new technologies. Yet now an ever-growing share of the fund's money – more than EUR 13 billion a year – is being spent simply subsidising and compensating businesses and households for high electricity prices. This, they say, is “papering over the cracks”, not investing in the future.
Legally, Germany's 2045 target remains in force. But sacrificing funding to defence and budget pressures means Germany is losing momentum, risking delays to the milestones it needs to hit and making the final goal extremely costly and difficult to reach. It is clear that choosing to invest in defence, in strengthening the security of the state and its citizens, means priorities have to shift – whether environmental campaigners of various stripes and origins like it or not. Which matters more? This is an approach we in Latvia should understand too...