Federal budget / German climate finance / Pledges & Commitments

German climate finance: New data shows 2023 decrease, 2025 pledge at serious risk

According to the German government’s climate finance report recently submitted to Brussels, budget allocations for climate finance in 2023 have fallen significantly compared to the previous year, now once again below the target of at least six billion euros per year. 2025 will see more troubles, as the government is planning more cuts to the budget of the development ministry (BMZ). This will make it unlikely that the 6 billion promise will be kept. A bleak outlook ahead of this year’s UN Climate Change Conference COP29.

Fig. 1: Breakdown of climate finance in 2023
Fig. 1: Breakdown of climate finance in 2023

The diagram shows the composition of German public climate finance in 2023. The green or green-shaded areas show funds from the federal budget. The orange field shows funds mobilised on the capital market, primarily for loans from KfW and DEG.

Every September, the government reports on climate finance for the previous year to Brussels under EU law. According to new figures, the federal budget allocations used to provide financial support to low-income countries for mitigation and adaptation to climate change totalled around €5.7 billion in 2023, significantly less than the approximately €6.4 billion reported for 2022. The drop in 2023 did not come as a surprise, as the high sums in 2022 were at least partly the result of several one-off effects from which climate finance figures could no longer benefit a year later.

Alongside the decrease of budget funds, there was an increase in funds mobilised by the German development bank KfW on the capital market used in particular to provide loans (that often require little or no budget funds to, for example, subsidise interest rates for recipient countries). This ‘mobilised finance’ totalled around €3.8 billion euros. Public climate finance from Germany therefore totalled around €9.5 billion in 2023. If private finance that Germany claims to have additionally mobilised are added, this results in a total level of almost €10 billion as Germany’s 2023 reported contribution to the developed countries’ commitment to provide and mobilise $100 billion a year. The German total for 2023 is about the same as it was in 2022, meaning that an increase in the provision of loans has compensated for the decrease in budget funds (that are mainly used for grants).

Fig. 2: Climate finance 2017-2025
Fig. 2: Climate finance 2017-2025

Budget funds (plus grant equivalents of subsidised loans) are shown in blue; total public funds (i.e. including loans based on mobilised finance) are shown in black. The green or green-shaded areas show various budget items, such as bilateral grants or contributions to multilateral climate funds. The orange areas show funds mobilised by KfW/DEG on the capital market, from which most of Germany’s climate loans are sourced. As per Germany’s pledge, budget allocations (plus grant equivalents) for climate finance should reach at least six billion euros annually by 2025; note that mobilised finance is not part of the commitment. Although the level promised for 2025 was already reached in 2022, it was not reached again in 2023. From Oxfam’s point of view, at least €8 billion would have been more appropriate for 2025.

Decreasing finance for adaptation

Not only total budget allocations for climate finance, but also those funds dedicated to adaptation have fallen in 2023, from around €2.8 billion in 2022 to around €2.4 billion reported for 2023. The actual number may be even lower, as Germany not only considers funds specifically targeting adaptation, but also adds half of the funds that were classified as serving both climate protection and adaptation (marked as ‘cross-cutting’ in climate finance reporting). This is, to some extent, a questionable practice, as this ‘cross-cutting’ category also includes numerous programmes whose climate relevance is often only vaguely recognisable and which often might rather target general environmental protection.

Fig. 3 provides some clarity. It shows that around a quarter of the budget allocations aimed at adaptation. When looking at total climate finance (i.e. including KfW loans generated via market funds), the proportion is less than one fifth. Or: The German government is a long way from achieving the internationally agreed balance between adaptation and mitigation.

Fig. 3: Breakdown by mitigation and adapation 2023
Fig. 3: Breakdown by thematic area 2023

Germany usually says that it has achieved a balance in the distribution of funds for mitigation and adaptation. However, this refers only to budget allocations (plus grant equivalents) as shown in the left pie chart and assumes that half of ‘cross-cutting’ finance also contributes to adaptation. When looking at total climate finance (right-hand side), only around 18% specifically aimed at supporting adaptation in 2023.

The development of adaptation finance is also worrying in that in 2021 developed countries committed to collectively double adaptation finance by 2025 compared to 2019. In order to contribute to this target, Germany would now also have to at least double its own adaptation funding. That would require budget allocations for adaptation reach a level of at least EUR 3.5 billion per year by 2025 (see Fig. 4). While adaptation finance has increased over the last years, it decreased considerably in 2023. In view of the cuts now planned for 2025 (see below), the decrease is likely to continue next year.

Fig. 4: Finance for adaptation 2019-2025
Fig. 4: Finance for adaptation 2019-2025

The chart shows adaptation finance (budget funds and grant equivalents of loans) over the years. For 2025, it is shown what German adaptation finance would have to achieve if Germany were to contribute to the target set at COP26 (of doubling adaptation finance by 2025 compared to 2019) by doubling adaptation finance from Germany, both for adaptation-only and for the assumption that 50% of ‘cross-cutting’ finance would also contribute to adaptation.

High share of loans in German climate finance

42% of bilateral climate financing in 2023 reached the recipient countries in the form of grants. This is a decrease compared to 2022 (48%) and 2021 (47%). More than half of German bilateral climate finance is provided as loans and other non-grant instruments (see Fig. 5).

Fig. 5: Climate finance 2023 by instrument
Fig. 5: Climate finance 2023 by instrument

* Including smaller amounts in the form of equity and other instruments. | Only budget funds for bilateral finance are shown. Germany contributes to multilateral climate funds and multilateral development banks mostly through grants (albeit with exceptions). However, these institutions (especially the development banks) often provide loans rather than grants. Including Germany’s multilateral contributions simply as grants in this chart would therefore be inappropriate.

Loans can play a role when funded projects result in direct revenue for the recipient country from which loans can be repaid – in a socially sustainable manner; however, this is not always the case, in particular for  adaptation projects that rarely lead to financial return (compared to a non-climate-change scenario). Also, recipient countries, many of which have made little or no contribution to the climate crisis, ultimately pay for the financed programmes themselves, when they repay the loans. This blatantly contradicts the principles of climate justice and can further increase the debt burden for countries, especially as their financial room for manoeuvre may also be severely impaired due to other crises (including continued effects of the Covid pandemic, or worsening climate change).

€6 billion promise likely to be broken

Just a year ago, the German government was confident that it would be able to achieve its goal of increasing funding to at least €6 billion a year in budget allocations for climate finance by 2025. Since then, things have become somewhat quieter, as new cuts are planned in the development ministry budget for 2025. This could make it impossible to fulfil the promise. The German government is not currently making any public statements, but if one would transfer the ratios between climate finance and other development cooperation finance in the relevant budget titles of recent years to the draft budget for 2025, climate finance in 2025 may reach just under €5 billion.

It would be quite embarassing for Germany, if Germany, usually regarded as a reliable partner on climate finance, may now be unable to keep its own pledge. Such a message ahead of the upcoming UN climate change conference COP29 is unlikely to be conducive to the painstakingly established basis of trust between developed countries and low-income countries. It is also a particular problem for COP29 because a new global target for climate finance for the period after 2025 is to be adopted at COP29 (the New Collective Quantified Goal, NCQG), building on the previous $100 billion goal. Germany and other developed countries insist on expanding the group of contributig countries – for instance to China and the rich Gulf states. Clearly, their agenda will not be perceived as particularly convincing if developed countries (here: Germany) fail to fulfil their own pledges from the past – pledges which need to be considered rather modest if compated to the needs of low-income countries and from a perspective of climate justice.

Next steps for the government

The government should now cancel its planned cuts in the development ministry budget in the ongoing process for establishing the 2025 federal budget, and increase climate finance in order to at least meet its current €6 billion promise next year.

In addition, it should increase the pledge itself – and aim for at least €8 billion a year in budget allocations for climate finance over the coming years. Such an increased target would be a more appropriate contribution of Germany in view of the increasing burden of the climate crisis in poorer countries and Germany’s continued economic strength and financial capabilities.

The government should also increase the proportion of funding for adaptation to climate change. A true balance (as agreed internationally) can only be achieved with a 50/50 split of total climate finance (i.e. not just budget allocations) between mitigation and adaptation.

Future increases in climate financing from Germany should focus primarily on the provision of grants in order to avoid further exacerbating the debt burden in poorer countries. This requires correspondingly more budget funds in the coming years and less reliance on market funds through the KfW.

Jan Kowalzig, Oxfam