Climate Action Funding in Germany and Canada – same goal, different (financial) approaches

By adopting the Paris Agreement in 2015, many countries including Germany and Canada decided to fight/agreed on fighting climate change and committed to a temperature increase limit of well below 2 degrees, 1.5 degrees at best. For these states and their federal governments, climate change is a task for the various municipalities which act on the local level of government within those countries. Both Canada and Germany are widely urbanized countries. Urban areas and cities in particular, have a major influence on greenhouse gas (GHG) emissions as they have both the power to cause and prevent them.¹ In addition, municipalities in rural areas are also key players in climate actions. In Canada, municipalities control over half the country’s GHG emissions;² in Germany, currently about one third of the country’s emissions could be reduced through municipal action.³ Municipalities are responsible for public transportation, infrastructure, local green spaces as well as waste management and permissions in the building sector – all highly relevant fields for climate action. Furthermore, local governments in both Canada and Germany have the bylaws and zoning powers⁴ in the fields most relevant to climate change action.⁵

However, the success of local measures greatly depends on the financial resources available to municipalities. With that in mind, the following short comparison focuses on the different financial resources made available to municipalities, particularly by the federal government of the respective country. It is thus more about funding than financing. “Climate Finance”⁶ is but one approach of analyzing (municipal) climate action and there are many more.

In Germany, legislative competence for climate change action and carbon neutrality lies with the federal government. However, municipalities are allowed to act in this field, whenever it is of specific relevance to the local community in their territory. For example, local authorities have to consider the sectoral targets from the Federal Climate Change Act (“Bundesklimaschutzgesetz”) in their planning and decision-making. Apart from that, there are multiple so-called subsidy programs (grants) provided by the federal and state level governments in order to support municipal climate action (e.g. the Climate Emergency Program⁷ or “Smart City” programs⁸ with funding rates up to 70 percent of the total cost).⁹

Article 28 of German Basic Law guarantees its municipalities the “right to regulate all local affairs on their own“. The municipalities’ constitutional rights, especially the right to self-governance, extend “to the bases of financial autonomy”. This so-called “general competence” empowers German municipalities to engage in all fields of local issues and to carry out their responsibilities in a relatively independent way. It also grants the right to financial autonomy. By using this right, municipalities have taken action through, among others, the use of Iocal taxes. In all these fields, larger municipalities and, respectively, cities are most important to focus on when it comes to climate action. This is mainly due to the higher population and, therefore, higher budget of cities. However, rural areas play an important role when it comes to renewable energy.

In Canada, municipalities often lack the power to act, as they can only act to the extent that the respective province grants them the appropriate authority; not only do municipalities have no constitutional authority with respect to climate protection, they have no constitutionally granted rights at all.¹⁰ Municipalities are rarely recipients of subsidies. There are, however, some grant programs and funding opportunities for municipal climate action, most importantly the Federation of Canadian Municipalities’ Green Municipal Fund (GMF).¹¹ Canadian municipalities, which are known as “creatures of the province“,¹² would generally rather act in terms of adapting to climate change than by mitigating it through building flood resilience¹³ and land planning for example. When considering financial investments and funding, property tax is the most important source of income for Canadian municipalities¹⁴ as there are not many transfers from the federal government or the provinces.¹⁵ Similar to the situation in Germany, some of Canada’s large cities are being targeted for climate action. Various cities such as the City of Montreal,¹⁶ Vancouver (Climate Emergency Action Plan) and Toronto have activated climate action plans¹⁷. Toronto’s “TransformTO Net Zero Strategy”, is of particular interest, because it shows the gap between the city’s ambitious goals and the lack of forward climate action on the provincial level.¹⁸

The lack of funding known as the climate investment gap¹⁹ was a particular challenge for smaller/rural municipalities which received little GMF funding in the 2021-2022 funding period, as 81 percent was allocated to towns and cities.²⁰ It must be taken into account that most Canadians live in cities and as such, there is often a lack of reporting in smaller and rural municipalities. Nevertheless, it is remarkable that almost the entirety of these finances go to cities and larger areas, whereas smaller and rural municipalities tend to not benefit. At the same time, it is mainly the smaller and rural municipalities that experience the impacts of climate change because they often depend on natural resources.

The different approaches to climate action shown above are, amongst other factors, due to different legal systems. In Germany, municipalities have a strong constitutional position, which includes direct obligations that concern climate protection, and they benefit from multiple funding opportunities as a result of their constitutional right to financial autonomy. Furthermore, municipalities have the legal freedom to give subsidies, access private capital as well as the right to set up municipal enterprises without the consent of the state or federal government.

In Canada on the other hand, municipalities have a weaker constitutional position that comes with less financial resources. They have very limited power to act without authorization, as the province has to agree on any taxation or user fees to transfer money from the provincial treasury.²¹ Nevertheless, Canadian municipalities are key players with ambitious and important individual, mostly voluntary, climate actions. Still, even in Germany, municipalities will need more funding as they are directly impacted by climate change and the resulting challenges will be even greater in the future. This applies to smaller and rural municipalities especially.