Federal government plans significant cuts to heating subsidies

Cuts in detail

In addition, the surcharge of currently another 20 percent in funding for replacing a still functional heating system that is at least 20 years old will decrease by four percentage points every six months starting next year. The so-called climate bonus for the early replacement of an old heating system is also set to decline more quickly than previously planned. According to this, the subsidy would expire in 2029. For instance, the efficiency bonus for heat pumps is to be eliminated, and switching from district heating to a different heating technology will no longer be subsidized.

The draft, which has been submitted to the Bundestag's Budget Committee, was also made available to the Deutsche Presse-Agentur (dpa). According to the Finance Ministry, the proposal stems from a coordination process among the ministries involved, led by the Federal Ministry for Economic Affairs. The background is a gap in the federal budget: if the current subsidy system were maintained, around 4.2 billion euros would be missing in the financial plan through 2030. The proposed reform, by contrast, would save up to 2.1 billion euros.

New bonus for European production

Also new is a so-called local content criterion. A bonus of up to 15 percent is to be granted if the new heating system comes from domestic production. In this context, "domestic production" means "Made with Europe" or "value creation within the EU and associated markets." This includes countries such as Japan or Canada, which have a trade agreement with the EU. However, the regulation has not yet been fully developed and is to be introduced at the earliest next year.

With the package of measures, the federal government aims to combine several objectives: relieving the budget, concentrating subsidies more strongly on low-income households, and creating incentives for European value chains. For homeowners with middle incomes, the package ultimately means lower subsidies than before. For low earners, the bonus rises, while at the same time the assessment base shrinks.

Background and outlook

The Finance Ministry said the draft was the result of an intensive coordination process within the federal government. When the Bundestag's Budget Committee will deliberate on the package was initially unclear. Observers pointed out that individual points – in particular the definition of domestic production and the exact gradation of income bonuses – are likely to remain politically contentious.

Critics fear that the declining subsidies could slow the transition to climate-friendly heating systems, as many owners would have to shoulder the higher acquisition costs of a heat pump on their own. Supporters point out that the reform specifically relieves low-income households and, with the local content bonus, strengthens European manufacturers. What is certain is that the reform noticeably changes the economic framework for one of the central climate-policy investment decisions in the building sector.