Schuldenbremse derails green goals

Greta writes*

Germany is facing a major fiscal crisis which led to the dismissal of Finance Minister Lidner and the dissolution of the traffic light coalition running the country (Leshner, 2024).

One key point of contention is the “Schuldenbremse” or debt brake, a constitutional rule implemented in 2009 that limits federal government borrowing to 0.35% of Germany’s GDP (IFO, 2023). In response to the COVID-19 pandemic and the war in Ukraine, it was suspended in 2020 to account for subsequent economic disruptions and has now been reintroduced for the 2024 federal budget (WZB, 2023). This has resulted in significant budget adjustments, including cuts to climate transformation funds and development projects, raising concerns about Germany’s ability to meet its own climate goals (Hüther, 2024).

The Paris Agreement obligates Germany to decrease greenhouse gas emissions by 65% by 2030 from 1990 levels, aiming for climate neutrality by 2045 (Climate Action Tracker, 2024). Critics have increasingly raised concerns about Germany’s ability to meet set climate goals due to underinvestment in infrastructure. The Climate Action Tracker rates Germany’s progress as insufficient, particularly in decarbonising the transport sector, which accounted for 19% of the nation’s greenhouse gas emissions in 2021 (Climate Action Tracker, 2023). Financial restraints driven by the debt brake have translated into significant underinvestment in the rail infrastructure for the past 15 years. For comparison: Germany’s annual rail investment lies at 0.6 % of GDP, while neighbouring Switzerland  invests 1.5% annually (Hüther, 2024). The result is a maintenance backlog of about €60 billion, a financial strain that has manifested in a 50% spike in train delays in 2022, exacerbated by outdated tracks and overcrowded routes (BR24, 2024).

Yet rail transport is a cornerstone of the transition to sustainable mobility. According to Germany’s Federal Environmental Agency Transport accounts for 20% of German emissions, with rail freight producing 80% fewer transmissions than road transport (Umweltbundesamt, 2023). Germany needs to cut its transport-related emissions by at least 42% by 2030 to hit its commitments under the Paris Agreement (Climate Action Tracker, 2024). Achieving this depends on shifting 25% of freight from road to rail, a goal that seems unattainable with current investment levels (Umweltbundesamt, 2024). Without reliable rail services, commuters alike freight have low incentive to switch from road to trail, as a result, Germany’s reliance on carbon-intensive road transport persists (Climate Action Tracker, 2024). Given projected freight demand increases of 40% by 2030, failure to modernise the rail network risks locking the country into carbon-intensive road transport, which will exacerbate, rather than reduce, emissions (Climate Action Tracker, 2024).

Without an overhaul of financial policies, including exemptions or adjustments to the debt brake, reaching the Paris Agreement goals in time will likely remain out of reach. With the climate crisis accelerating, Germany’s fiscal rigidity could put its climate leadership at risk, affecting not just Germany but the EU and global climate efforts.

Bottom Line: Failure to reform the debt brake or adopt alternative financing mechanisms means underfunding Germany’s rail network, which will prevent it from meeting its Paris commitments.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).