BVerfG Budget Ruling 2023 and Energy Subsidies

What the BVerfG budget ruling decided

In the BVerfG budget ruling of 15 November 2023 (2 BvF 1/22), the Second Senate of the Federal Constitutional Court declared the Second Supplementary Budget Act 2021 void. That Act had transferred EUR 60 billion of borrowing authorisations, originally granted in 2021 to deal with the COVID-19 pandemic emergency but not used, to the Energy and Climate Fund, a special-purpose fund later renamed the Climate and Transformation Fund (Klima- und Transformationsfonds, KTF). The Court held that the reallocation violated the constitutional debt brake and budgetary principles. With one stroke, the KTF lost EUR 60 billion that the federal government had planned to finance energy transition and industrial decarbonisation programmes.

For companies relying on public funding, the BVerfG budget ruling was a turning point. Programmes for building renovation, electric mobility, hydrogen, industrial decarbonisation and semiconductor investments had been budgeted in the KTF. The ruling forced the government to restructure the fund, cut or postpone programmes and reconsider how energy subsidies are financed. Subsequent constitutional amendments in 2025 created new financing room, but the ruling's principles continue to shape how public funding for the energy transition can be designed and how reliable it is.

Background: the Second Supplementary Budget Act 2021

The constitutional debt brake in Article 109(3) and Article 115(2) of the Basic Law limits federal structural borrowing to 0.35% of GDP, but allows exceptions in natural disasters or unusual emergency situations beyond state control that significantly impair state finances, by resolution of the Bundestag.

In 2021, the Bundestag declared such an emergency because of the pandemic, and the First Supplementary Budget Act 2021 increased borrowing authorisations by EUR 60 billion. Those authorisations were not needed in 2021. In early 2022, after the end of the 2021 financial year, the Bundestag adopted the Second Supplementary Budget Act 2021, which transferred the EUR 60 billion to the Energy and Climate Fund for use in later years, with the stated aim of overcoming the economic consequences of the pandemic and accelerating the transformation of the economy.

197 members of the Bundestag applied for abstract judicial review. They argued that the reallocation circumvented the debt brake by converting emergency borrowing into a reserve for unrelated future spending.

The holdings of the BVerfG budget ruling

The Court's headnotes set out three principles. First, beyond the wording of the Basic Law, there must be a causal connection between the emergency and the exceeding of credit limits. The legislature has a wide margin of appreciation in assessing that connection, but this corresponds to a burden of substantiation in the legislative process, and the further away in time from the emergency the borrowing is used, the higher that burden becomes.

Second, the budgetary principles of annuality and the current-year principle apply to emergency borrowing: the legislature may not circumvent them by parking emergency borrowing authorisations in legally dependent special-purpose funds for use in later years. Third, a supplementary budget must be adopted before the end of the financial year to which it relates.

The Second Supplementary Budget Act 2021 failed on all three counts. The legislature had not adequately explained the causal connection between the pandemic emergency and the climate-related spending; the authorisations were to be used in later years in breach of annuality; and the Act was adopted in January 2022, after the end of the 2021 financial year, in breach of the principle that the budget must be determined in advance. The Act was therefore declared void in its entirety.

Consequences for funding programmes

The immediate effect was a budget crisis. The federal government imposed a temporary freeze on new commitments, declared an emergency retroactively for 2023 to cover expenditure already incurred, and renegotiated the 2024 budget. Within the KTF, programmes were cut, restructured or ended earlier than planned. A prominent example was the end of the purchase premium for electric vehicles at short notice in December 2023. Other programmes, such as funding for building renovation and industrial decarbonisation, continued in modified form or with reduced budgets. Projects that relied on future funding rounds faced uncertainty, and some investors postponed final investment decisions until budgets were clarified.

For businesses, the BVerfG budget ruling highlighted the difference between political announcements and legally secure funding. Funding programmes based on federal guidelines generally do not create a legal entitlement to funding; rights arise from a funding decision (Zuwendungsbescheid) or a funding contract. Companies that had received binding commitments were in a far stronger position than those planning to apply. The ruling also showed that funding resting on special-purpose funds outside the core budget can be vulnerable if the financing of the fund is constitutionally fragile.

Legal protection for funding recipients

When budgets tighten, the legal position of companies that have already received funding becomes important. A funding decision is an administrative act. Once it has been issued and become final, it can only be revoked under the conditions of the Administrative Procedure Act, for example under § 49 VwVfG where the funds are not used for the specified purpose or conditions are breached, or where the decision itself reserves revocation. Budget shortages alone do not normally justify revoking a lawful funding decision for the past, although future instalments may depend on available budget appropriations if the decision says so. Where a decision is revoked, § 49a VwVfG governs repayment and interest.

Companies should therefore read funding decisions and the incorporated general conditions (Nebenbestimmungen) carefully, including budget reservations, milestones, reporting duties and procurement obligations. Breaches of these conditions are the most common grounds for revocation, and authorities scrutinise them more closely when funds are scarce. Where an authority delays a decision or rejects an application, legal remedies include an objection and an action before the administrative courts, but courts generally only review whether the authority applied its funding guidelines and administrative practice consistently and without discrimination.

Beyond the federal level

The BVerfG budget ruling also influenced the federal states. Several states had used similar constructions, setting up special funds financed by emergency borrowing for purposes that extended beyond the immediate emergency. After the ruling, these arrangements were reviewed and, in some cases, challenged before state constitutional courts. Companies benefiting from state programmes should therefore check how those programmes are financed. Municipal utilities and public companies that depend on transfers from state or local budgets for investments in heat networks, public transport or renewable energy should equally consider the budgetary basis of their funding.

The 2025 constitutional amendments

In March 2025, the Basic Law was amended to create additional financial room. Article 143h GG allows the Federation to set up a special fund with its own borrowing authorisation of up to EUR 500 billion for additional investments in infrastructure and in achieving climate neutrality by 2045, exempt from the debt brake, with investments to be approved within twelve years; EUR 100 billion is to be transferred to the KTF and EUR 100 billion is available to the states.

In addition, Article 115(2) GG now exempts certain defence and security expenditure exceeding 1% of nominal GDP from the borrowing limit. These amendments responded to the constraints made visible by the BVerfG budget ruling.

The new special fund relies on an explicit constitutional basis, which makes it more robust than the 2021 reallocation. However, the principles of the ruling, such as the requirement that funding be "additional" and budgetary transparency, still apply, and the detailed use of the funds is governed by federal legislation and annual budget decisions. Companies should expect that programmes financed from the special fund will be subject to scrutiny of additionality and timing.

State aid and programme design after the ruling

Funding for the energy transition must also comply with EU state aid law. Most German programmes rely on the Commission's Climate, Energy and Environmental Aid Guidelines (CEEAG), the General Block Exemption Regulation or individual approvals, including temporary frameworks. The BVerfG budget ruling did not change those requirements, but it changed the budget environment in which programmes are designed.

Instruments with long-term payment obligations, such as climate protection contracts (Klimaschutzverträge) that pay companies the difference between conventional and low-carbon production costs over many years, require stable budget authorisations, which in turn require careful planning under the debt brake. Contracts of this kind include provisions on budget availability, which companies should read carefully.

Funding risk in transactions and project finance

Funding has become a significant value driver in energy transition projects, and the ruling has made lenders and investors more cautious about it. In project finance, banks typically require that funding decisions are in place before financial close, that conditions precedent cover the absence of revocation events and that the borrower's model remains viable if funding is delayed. In M&A, buyers examine whether the target's funding decisions can be transferred, whether a change of control requires the authority's consent and whether past compliance with funding conditions is documented, because breaches can lead to repayment claims after closing. Warranties and specific indemnities for funding risks are now common in transactions involving subsidised assets, often supported by escrow arrangements.

Lessons for companies

• Distinguish between programme announcements, funding guidelines and binding funding decisions or contracts.
• Review funding conditions, including revocation, clawback and budget reservations.
• Plan for delays and changes in programme budgets, particularly where funding depends on special funds.
• Monitor federal budget decisions and the implementing legislation for the special fund under Article 143h GG.
• Ensure compliance with state aid conditions, as repayment risks also arise from state aid law.

How TRW & Co helps

We advise companies on public funding for energy, climate and industrial projects, including applications, funding contracts, state aid compliance and disputes about revocation and repayment. We assess how budget developments such as the BVerfG budget ruling and the 2025 constitutional amendments affect specific programmes and projects. Our work connects with our state aid and hydrogen and decarbonisation practices; see also our notes on climate protection contracts and state aid for climate and energy. Please contact us to discuss your funding strategy. This briefing is general information and not legal advice.