The German subsidy state: Well over 100 billion euros of taxpayers' money for tax breaks and subsidies

How Germany distorts market prices, socializes risks, and makes the middle class pay with over 100 billion euros in subsidies

Germany spends well over €100 billion annually on subsidies and tax breaks – a historic record that is increasingly overriding the rules of the social market economy. But who truly benefits from this massive expenditure of taxpayers' money? While large corporations and energy-intensive industries rejoice in tailor-made funding programs, tax breaks, and electricity price reductions, traditional small and medium-sized enterprises (SMEs) are increasingly being asked to foot the bill. The energy transition, in particular, is degenerating into a complex redistribution apparatus: risks are socialized, profits privatized, and competitive conditions systematically distorted. This article sheds light on the gigantic dimensions of Germany's "subsidy republic," exposes the hidden costs for citizens and small businesses, and demonstrates why a radical shift in economic policy is urgently needed to safeguard the state's financial viability.

The tip of the iceberg: Why even 100 billion euros is still an underestimate

This sum of just over 100 billion euros, however, only marks the absolute conservative lower limit of government redistribution. If one applies a broader macroeconomic definition of subsidies – as, for example, the Kiel Institute for the World Economy (IfW Kiel) does – the financial dimension takes on far more dramatic proportions. The IfW's calculations for total government subsidy volume include not only federal, state, and local government funding, but also EU funds, the Federal Employment Agency, and the monetary equivalents of KfW loans.

The result of this overall calculation: According to the Kiel Institute for the World Economy (IfW), total government subsidies already amounted to €168.7 billion in 2015. The institute estimated the volume at over €252 billion for 2022, and the Kiel Subsidies Report projects a staggering €285.3 billion for 2024. Therefore, while the public debate may technically refer to "over €100 billion," this is a massive understatement. The actual subsidy burden on the German economy has long since shifted to between €250 and almost €300 billion.

Germany as a Republic of Subsidies: Dimensions and Dynamics – Who Wins, Who Pays?

Germany has gradually transformed into a subsidy-dependent republic, where state financial aid and tax breaks play a central role in economic and energy policy. According to the Federal Government's latest subsidy report, the volume of federal subsidies will rise from around €45 billion in 2023 to almost €77.8 billion in 2026 – a record level that visibly shifts the regulatory framework of the social market economy. If subsidies from states and municipalities are included, the total annual volume, financed directly or indirectly from taxpayers' money, amounts to well over €100 billion.

The dynamics of recent years are particularly striking: while direct federal financial aid was budgeted at €11.7 billion in 2020, this figure is projected to reach €59.5 billion by 2026, representing approximately 10 percent of the total federal budget. Simultaneously, federal tax breaks are budgeted at €18.4 billion, supplemented by a further €20 billion from states and municipalities. This development signifies a twofold shift: away from clearly visible spending programs towards special tax regulations, and away from a neutral tax and levy system towards a politically heavily controlled instrument for steering investment, production, and consumption.

From an economic perspective, subsidies are always a double-edged sword. They can correct market failures, for example in innovation, infrastructure, or climate protection, but they can also create perverse incentives, perpetuate unproductive structures, and entrench political patronage. With the massive expansion of subsidies in energy, industry, transport, and housing, Germany has reached a point where the question of efficiency, distributive justice, and the long-term sustainability of subsidy policy is no longer merely academic, but fiscally and socially critical.

The new energy transition economy: Relief on electricity prices – redistribution in the background

The largest single federal subsidy is now the assumption of the costs for promoting electricity from renewable energy sources under the Renewable Energy Sources Act (EEG). Since the abolition of the EEG surcharge for end customers, these costs are no longer financed through consumers' electricity bills, but directly through the federal budget. For 2026, subsidies of around €17.2 billion are earmarked for this purpose to reduce electricity prices, representing almost a third of the federal government's direct financial aid.

Economically, this means a profound restructuring of the cost distribution of the energy transition. Previously, households and businesses paid the costs of the Renewable Energy Sources Act (EEG) transparently via their electricity bills; today, they are financed through general tax revenue, which in turn is heavily influenced by wage, income, and corporate taxes. This shifts the burden: taxpayers with middle and higher incomes bear a large share of these costs, while particularly energy-intensive companies continue to benefit from numerous exemptions and compensations.

In addition to the EEG financing, further relief measures are granted for grid fees and electricity tax, which are politically marketed as relief packages but in reality create complex redistribution balances. For example, starting in 2026, the federal government will reduce grid fees for electricity through a subsidy of €6.5 billion annually, while the electricity tax for around 600,000 manufacturing companies, as well as farmers and foresters, will be permanently reduced to the European average. For large industrial consumers and energy-intensive companies, this results in several subsidy streams that significantly lower the effective electricity price, while many smaller companies and businesses benefit considerably less.

The result is an energy transition regime that, from the outside, appears as a form of "relief," but in reality is a complex web of subsidies, levies, and exemptions. Ultimately, the risk of long-term cost increases is shifted to the tax budget and thus onto future taxpayers and upcoming legislative periods. Investment signals in the electricity market are distorted by government price support; the politically induced electricity price increasingly deviates from the market-based price.

Overview of government financial aid: From building renovation to hydrogen

The federal government's direct financial aid is heavily focused on energy and climate policy, infrastructure, and selected future technologies. The ten largest aid programs together account for nearly €50 billion, representing approximately 80 percent of total federal financial aid. In addition to reducing electricity prices, the programs focus particularly on investments in buildings, microelectronics, hydrogen, grid infrastructure, and transportation.

The largest programs include in particular:

• Promotion of energy efficiency and renewable energies in the building sector with around 12 billion euros annually (insulation, new heating systems, PV, heat pumps).
• Funding for microelectronics with around 5 billion euros, especially for semiconductor and chip factories.
• Subsidies for energy-intensive companies to compensate for emissions trading-related electricity price increases amounting to 3 billion euros.
• Programs for social housing with 2.6 billion euros are intended to support new construction activity in the lower rental segment.
• IPCEI hydrogen projects along the entire value chain with 2.3 billion euros.
• Funding for broadband expansion with approximately 2.2 billion euros, primarily in economically unattractive regions.
• Subsidies for charging and refueling infrastructure, transformation of heating networks and efficiency programs in the economy with further billions of euros.

These programs primarily pursue climate and structural policy objectives. According to the Federal Ministry of Finance, around 90 percent of federal financial aid is now allocated to environmental and climate protection goals. From an economic perspective, the focus on transforming the energy system, building stock, and industry is fundamentally plausible, given the significant external effects, path dependencies, and coordination challenges involved. However, questions arise as to whether the specific design of these programs is efficient, whether duplication of structures will occur, and whether persistently high funding rates will lead to windfall gains and over-subsidization.

Especially with infrastructure and industrial projects – such as large-scale investments in microelectronics or hydrogen – there is a risk that the state, in the international race for subsidies, will create ever-increasing incentives without ensuring sustainable business models or genuine competitive advantages in the long term. The line between industrially sound anchor investments and a subsidy spiral, in which locations are only attractive as long as the state provides funding, is blurred.

Tax breaks: The invisible part of the subsidy iceberg

Besides explicit financial aid, there is a second, often less visible, form of subsidy: tax breaks. These take the form of reduced tax rates, exemptions, or special regulations and appear in statistics as lower tax revenues. For the federal government, states, and municipalities, these tax breaks are estimated at over €40 billion annually, with the federal government contributing €18.4 billion in 2026.

The ten largest tax breaks alone cause a loss of tax revenue of around 30 billion euros. The tax advantages for business assets and shares in corporations in cases of inheritance and gifts are particularly costly, amounting to approximately 8.8 billion euros per year. The aim of this regulation is to facilitate business succession and ensure the continuation of companies; however, large fortunes and corporate groups benefit disproportionately, which is controversial from a distributional policy perspective.

Other major items include:

• Reduced VAT rate for cultural and entertainment services (books, tickets, cultural offerings) amounting to 4.3 billion euros.
• Tax exemption for surcharges for Sunday, holiday and night work amounting to 3.2 billion euros.
• Tax relief for skilled trades services in private households amounting to approximately 2.5 billion euros.
• Electricity tax relief for the manufacturing industry as well as agriculture and forestry amounting to approximately 2.5 billion euros.
• Reduced tax rate for local and long-distance public transport amounting to 2.4 billion euros.
• Reduced VAT rate for accommodation services (hotel stays) amounting to 1.8 billion euros.
• Tax breaks for electric and plug-in hybrid company cars totaling 1.7 billion euros.
• Tonnage tax for merchant ships in international traffic amounting to 1.5 billion euros.
• Energy tax breaks for fuels used in electricity generation amounting to 1.2 billion euros.

These incentives pursue very different goals: promoting culture and mobility, reducing the burden of shift work, incentivizing investment in building renovations, strengthening the competitiveness of energy-intensive sectors, or location policies for shipping companies. From a long-term perspective, however, the question arises as to which of these regulations still truly serve a clear economic policy purpose and which primarily represent historically established privileges that are hardly ever systematically reviewed.

Historical dimensions: The most influential subsidy blocks

Throughout the history of the Federal Republic of Germany, certain subsidies and tax breaks have proven particularly influential – whether due to their volume, their duration, or their structural impact. A strictly quantitative top-ten ranking across all decades is methodologically difficult due to changing statistics and evaluation criteria. However, based on historical subsidy reports and economic analyses, the most important items can be outlined as follows:

Top ten tax breaks and subsidies (historically aggregated)

Rank	Subsidy / Tax break	Character and meaning
1	Promotion of renewable energies (EEG, electricity price/network fee subsidies)	In the long term, tens of billions of euros annually; a central pillar of the energy transition.
2	Inheritance/gift tax (preferential treatment of business assets)	High, recurring tax revenue shortfalls; crucial for large fortunes.
3	Agricultural subsidies & agricultural diesel	Continuous funding for decades (EU and national).
4	Coal and hard coal subsidies (including adjustment funds)	Long-term support for a sector that is structurally no longer competitive.
5	Housing subsidies (social housing programs)	A central pillar of the rental housing market for decades.
6	Transport sector subsidies (public transport, rail, diesel privilege)	A combination of subsidies, tax privileges, and investments.
7	Energy-intensive industries (electricity tax, compensation schemes)	Systematic relief for certain industries; cumulatively high amounts.
8	Family/social policy tax advantages (splitting of married couples, etc.)	High influence on distribution, often not labelled as a classic "subsidy".
9	Industrial and regional development (reconstruction in the East, cohesion)	A mix of financial aid, guarantees, and special rules.
10	Cultural and media funding (reduced VAT, film funding)	A growing field with significant, but not dominant, volumes.

This overview illustrates that subsidies in Germany are not just a short-term crisis instrument, but have shaped entire sectors, ownership structures and consumption patterns for decades.

The methodological fallacy: Why rankings are misleading

An uncritical glance at this top ten list might seem to confirm the widespread narrative of "expensive renewables"—after all, the Renewable Energy Sources Act (EEG) ranks first, while coal comes in fourth and nuclear power is completely absent. However, this list structure is the best example of the distorted perception in the subsidy debate.

The reason for this ranking is a methodological asymmetry: Renewable energy subsidies are summarized as a single, gigantic, and transparent block (EEG), which also reached its historical peak in recent years. Subsidies for the fossil fuel and conventional energy systems, on the other hand, are stretched further back in time and massively fragmented in the list: They are hidden in coal (rank 4), in the transport sector with the diesel tax break (rank 6), and in the compensation schemes for energy-intensive industries (rank 7). Nuclear energy doesn't even appear in such budget rankings, since the state primarily assumed perpetual liabilities (final storage) and liability waivers, which are difficult to reflect in traditional annual budgets.

The true hierarchy of subsidy recipients

If all direct aid, indirect privileges, and external costs were systematically and rigorously grouped by energy and economic sectors, a different, more realistic picture would emerge. A consolidated analysis of total subsidies since 1949 (realistically estimated) reveals the following hierarchy:

Industry	Total funding (estimated, actual)	Key instruments
hard coal	approx. €288–337 billion (1950–2018)	Financial aid, coal levy, purchase guarantees
nuclear energy	approx. €204–304 billion (1950–2030)	Research funding, tax benefits, liability exemption
agriculture	several hundred billion euros (1957–present)	CAP direct payments, national aid
housing	several hundred billion euros (1949–present)	Home ownership allowance, increased depreciation, social housing
Renewable energy	approx. €146 billion (1970–2016) + approx. €200 billion EEG surcharge (2000–2021) + ongoing approx. €18–21 billion/year *1	EEG surcharge, federal budget (from 2022)
Lignite	approx. €67–100 billion (by 2020)	Regional structural aid, coal phase-out compensation
Traffic	Over €30 billion per year on an ongoing basis	Diesel tax break, kerosene tax exemption, commuting allowance
automotive industry	several tens of billion euros (and rising)	Electric car subsidies, R&D funding, short-time work allowance

(Note: Due to different methods of definition and sources, the figures should be understood as orders of magnitude).

Costs vs. Benefits: The Asymmetry of Energy Subsidies

If we look at an exactly identical comparison period in the past (roughly 1970 to 2016) from this list, a massive imbalance becomes apparent: Fossil fuels and nuclear power were subsidized with a total of 674 billion euros during this time, while clean energies received only 146 billion euros. Historically, the state has subsidized the conventional energy sector almost five times as much.

However, the fiscal reality also includes the fact that the costs of the Renewable Energy Sources Act (EEG) only reached their absolute peak from 2017 onwards. As the table above shows, the total EEG subsidies from their introduction in 2000 until the end of the payments around 2041 will amount to approximately 350 to 400 billion euros. This means that, in the long term, renewables will reach a similar financial scale to the historical individual subsidies for hard coal (288 to 337 billion euros) or nuclear power (204 to 304 billion euros).

The crucial difference between these sums, however, lies not in their amount, but in their economic impact

The hundreds of billions spent on hard coal and nuclear power largely flowed as maintenance subsidies for technologies whose infrastructure is now outdated, decommissioned, or burdened with immense long-term liabilities. In contrast, the EEG funds acted as global seed funding: they brought a formerly expensive niche technology to market maturity, drastically reduced production costs, and established a sustainable, climate-neutral power plant fleet. The massive subsidy costs are largely a thing of the past, as new wind and solar power plants are now among the most competitive sources of electricity anyway.

The fact that the public debate primarily focuses on the costs of renewable energy is a result of differing financing methods. While the EEG surcharge was highly transparent for over two decades and directly reflected in every household's electricity bill, the far larger sums for coal and nuclear power flowed well hidden: through tax breaks, general budget items, and the unpriced risks to people and the environment. This asymmetrical transparency continues to shape political discourse today and systematically obscures the true historical costs of the fossil fuel economy.

The historical pattern: Billions spent on the past

Shipbuilding and aerospace complement this industry analysis as further historical major recipients of state aid. Although their absolute volume is smaller than that of the energy sector, they illustrate the same recurring pattern: industries with strong unions, high regional concentration, and politically well-connected management secure disproportionate state subsidies, even when economic logic contradicts this. Despite decades of subsidies, German shipbuilding lost out on international competition, and despite massive state support, the nuclear industry never produced economically competitive electricity without state guarantees.

The overarching conclusion from this industry overview is sobering: throughout its history, Germany has invested enormous sums in sectors that delayed or prevented structural change instead of shaping it. At the same time, the technologies that could secure the economic future today were promoted later and with less funding. The historical pattern of subsidies is not the story of a successful industrial policy, but rather the story of insuring the status quo against the challenges of change – paid for by those who have benefited the least.

Industry focus areas: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

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The top ten in German subsidy history: The largest funding programs from 1949 to the present day

If one were to compile a historical ranking of the most significant German subsidies and tax breaks since the founding of the Federal Republic – measured by their cumulative total volume over decades – the result would be a picture that dispels common prejudices:

1. The hard coal subsidy (approx. 288–337 billion euros)

The single largest subsidy in the history of the Federal Republic of Germany is undoubtedly hard coal. For over six decades, state funds flowed into its extraction. Even after the economic viability of domestic mining had clearly disappeared in the 1970s, politicians clung to its subsidies – out of consideration for voter groups in the Ruhr region and Saarland, as well as for powerful industrial corporations like RWE and ThyssenKrupp, which, as shareholders of Ruhrkohle AG, profited from the flow of subsidies.

2. Nuclear energy (approx. 204–304 billion euros)

In second place is an item often missing from official budgets: nuclear power. From the 1950s to the present day, government funding for research, tax breaks, and above all, the assumption of long-term liabilities (final disposal, such as at Asse) as well as government liability exemptions in the event of accidents have totaled over 200 billion euros. This represented a massive government risk assumption in favor of a small number of energy companies.

3. Promotion of renewable energies (approx. 350–400 billion euros projection)

Only in third place – and on par with the historical fossil fuel-based power plants – is the financing of the energy transition (Renewable Energy Sources Act, EEG). Considering the entire life cycle of the subsidies from 2000 until the contracts expire around 2041, the costs amount to an estimated 350 to 400 billion euros. The historical difference compared to the first and second most expensive sectors: This was not a maintenance subsidy for outdated structures, but rather a global start-up financing that brought clean technologies (wind/solar) to their current market maturity and price competitiveness.

4. Housing construction subsidies (hundreds of billions cumulatively)

Taking all measures into account, the promotion of real estate was the quintessential subsidy complex for decades. The homeownership allowance alone cost up to six billion euros annually between 1996 and 2005. Together with the increased depreciation allowances under Section 7b of the Income Tax Act (since 1949) and the historical investments in social housing, gigantic sums flowed into wealth accumulation and the rental market over the decades.

5. Agricultural subsidies (hundreds of billions cumulatively)

Since the founding of the Federal Republic of Germany, agriculture has received massive support. Through various instruments – historical market regulations, EU direct payments, the national joint task of “agricultural structure” and special tax regulations such as the agricultural diesel tax – the agricultural sector has remained one of the most heavily and permanently subsidized economic sectors in the country.

6. Fossil fuel transport subsidies (over €30 billion annually)

The German Federal Environment Agency estimates that Germany currently spends over €65 billion annually on environmentally harmful subsidies. The largest single category is transportation: tax breaks for aviation fuel (kerosene) and the diesel tax break (approximately €11.5 billion per year) have accumulated over the decades to astronomical historical sums. This makes Germany the EU leader in tax breaks for fossil fuel-based mobility.

7. Preferential treatment of business assets in inheritance tax

With tax losses exceeding €5 billion annually, the inheritance tax exemption for business assets represents one of the largest tax subsidies of our time. Historically, this amounts to a gigantic sum of money lost to the state. The regulation, originally intended to ensure the survival of small family businesses, often benefits large corporations and the very wealthy in practice.

8. Lignite subsidies and coal phase-out (approx. 67–100 billion euros)

Besides historical structural aid and the long absence of CO₂ pricing, the coal phase-out illustrates a paradoxical subsidy mechanism of recent times: The 2020 law subsidized the lignite companies RWE and LEAG alone with €4.35 billion as compensation for early shutdowns. The state is paying billions here so that companies cease a climate-damaging activity for which they had already enjoyed state support for decades.

9. Exceptions for energy-intensive industries

Exemptions from electricity tax, reduced grid fees, and compensation for the European emissions trading scheme provide billions of euros in relief to large industries annually. Over the decades, a complex system has developed here, intended to ensure competitive prices in Germany's industrial sector, but in practice, for a long time primarily rewarded the consumption of electricity from (historically fossil-fueled) large power plants.

10. Commuting allowance and company car privilege

Commuter subsidies result in annual tax losses in the high single-digit billions. Historically, this effect has accumulated massively and disproportionately benefits higher income groups, as the tax benefit increases with the individual's marginal tax rate. Furthermore, the simultaneous existence of commuter allowances, subsidized company cars, and the Deutschlandticket (Germany-wide public transport ticket) leads to an expensive and contradictory double subsidization of transportation.

Asymmetries of the energy transition: Large industry benefits, medium-sized businesses pay

Current energy policy is particularly notable for its unequal distribution of burdens. Large industrial corporations benefit from numerous exemptions, individual electricity supply contracts, and targeted subsidy programs, while traditional small and medium-sized enterprises (SMEs) – from craft businesses to bakeries – are trapped in a complex system of levies, grid fees, and rising costs.

Energy-intensive companies not only receive compensation payments for electricity price increases due to emissions trading, but also significant relief from electricity and energy taxes, as well as special levy regulations. In addition, there are large-scale industrial policy programs, for example for hydrogen, microelectronics, or battery factories, which primarily benefit large players who possess the necessary project size and capital strength. Medium-sized enterprises, on the other hand, while also bearing the general energy costs and tax burden, typically have neither access to individual large-scale contracts nor to high-volume investment premiums.

The planned financing of new backup capacities in the electricity system via levies and charges is particularly problematic, especially in the context of a large-scale gas-fired power plant strategy. If the costs of capacity provision are largely distributed among all electricity consumers via grid fees and levy systems, those industries that benefit primarily from high security of supply and privileged conditions will profit most. Small and medium-sized enterprises, on the other hand, receive no specific benefit beyond general grid stability, yet pay proportionally more because they have fewer opportunities to circumvent high electricity prices.

This pattern leads to a structural imbalance in the energy transition: Politically, security of supply is presented as "without alternative," but economically, the costs are primarily distributed through instruments that burden small and medium-sized enterprises (SMEs) more than large industrial corporations—both in absolute terms (via price levels) and relatively (lower access to subsidies, less bargaining power). This creates a kind of two-tiered energy transition: a heavily secured, subsidized industrial energy sector and a cost-sensitive, often pressured SME sector that has less political clout.

Gas-fired power plants, capacity markets and new dependencies

A key component of current energy policy is the planned massive expansion of gas-fired power plants as flexible reserve capacity for a largely renewable energy grid. Politically, this step is presented as a guarantee of security of supply, necessary to replace coal and nuclear power while simultaneously cushioning peak loads. However, the crucial issue is not just the construction of these power plants, but above all, their financing and integration into market or levy systems.

If these capacities are financed primarily through capacity-based remuneration models (capacity markets, availability payments) and regulated charges, the risk shifts from the operators to the general public. Operators receive predictable revenues, regardless of the actual utilization of the facilities, while the costs are distributed to electricity customers and taxpayers via grid fees, levies, or subsidies. From an economic perspective, this creates a form of partially nationalized investment security, in which the state or the general public cushions fluctuations in revenue.

Small and medium-sized enterprises (SMEs) are doubly affected by this model. On the one hand, the fixed cost level of the energy sector rises because capacity and infrastructure must be pre-financed. On the other hand, the typical SME has neither the negotiating power to secure its own direct supply contracts nor the ability to systematically participate in these new capacity models. Large industries and energy companies operate within a finely balanced regulatory framework that minimizes their risks, while SMEs are integrated into this system through standardized tariffs and charges.

Furthermore, there is a long-term dependence on natural gas as an energy source, which, although it is expected to become increasingly "green" in the future (e.g., via hydrogen or synthetic gases), will remain subject to considerable uncertainties regarding availability and price for the foreseeable future. A system that relies heavily on gas-based backup capacities thus remains indirectly vulnerable to international price volatility, geopolitical risks, and technological path dependencies. The costs of these risks are, in turn, largely embedded in the general tariff and levy structures – and burden all electricity consumers, especially those without their own market power.

Subsidies and competition law: Between location policy and market distortion

From an economic policy perspective, the question arises as to whether the increasing subsidization of large German corporations is compatible with the principles of the social market economy. Classical ordoliberal approaches emphasize that while the state should set framework conditions and correct market failures, it must not selectively grant lasting advantages to individual companies or sectors. However, the reality of subsidy policy increasingly deviates from this.

Industrial subsidies – whether for semiconductor factories, battery plants, large-scale hydrogen projects, or energy-intensive basic materials industries – are justified with arguments related to location: The aim is to secure added value, jobs, and technological sovereignty in an increasingly fierce global competition, particularly with China and the USA. In practice, however, this often means that politically well-organized and economically prominent industries exert a strong lobbying influence, while less visible but employment-intensive sectors receive hardly any comparable support.

Subsidies can distort competition by favoring not the most efficient, but rather the most politically connected players. Furthermore, they can increase barriers to market entry because new, smaller providers lack access to the same funding programs and the resources to manage complex applications and combinations of subsidies. Securing capacity in the energy sector, heavy industry, or infrastructure through special funding regimes can reduce pressure to innovate and adapt, ultimately leading to lower productivity.

Furthermore, there is a European legal aspect to consider: State aid must, in principle, comply with EU state aid law. While the EU has significantly relaxed its state aid framework in recent years, particularly for energy, climate, and digitalization, the risk of "subsidy competition" within the EU remains, in which financially strong states systematically provide their companies with more support than those of financially weaker countries. This can fragment the single market and distort competitive conditions.

Distributional effects: Who benefits, who bears the burden?

A key economic question is: What are the distributional effects of current subsidy and tax break policies? Looking at the network of direct financial aid, tax exemptions, and pay-as-you-go financing, a pattern emerges in which certain groups benefit disproportionately, while others tend to be more burdened.

The main beneficiaries include:
– Large industries and energy-intensive businesses that benefit from electricity and energy tax breaks, compensation payments, and individual supply contracts.
– Well-capitalized corporate structures and large fortunes that particularly benefit from the preferential inheritance tax treatment of business assets.
– Sectors with strong political and social legitimacy, such as renewable energies, the building and heating sectors, and infrastructure projects, which receive substantial subsidies.

Those most burdened are:
– Small and medium-sized enterprises, which may benefit from individual efficiency or subsidy programs, but are generally exposed to higher relative cost pressures regarding energy, regulation, and taxes.
– Taxpayers with middle and higher incomes, who bear the largest share of state financing and thus also finance subsidy policies.
– Households, which – despite targeted relief measures – indirectly bear the costs through higher prices, hidden levies, and reduced budgetary flexibility (e.g., in education, infrastructure, or security).

These distributional effects are politically explosive because they influence perceptions of justice. If the impression arises that well-connected groups have privileged access to subsidies and tax breaks, while the broad middle class foots the bill, this undermines the acceptance of both the energy transition and economic and fiscal policy as a whole. In this climate, populist narratives that mobilize against "elites" or "subsidy hunters" can easily take hold.

Historical context: From reconstruction to long-term funding

Historically, subsidies in the Federal Republic of Germany were primarily an instrument of reconstruction and structural change. In the 1950s and 1960s, targeted aid for mining, the steel industry, agriculture, and housing construction was paramount, aimed at securing employment and mitigating regional disparities. Over time, many of these measures were made permanent, some reformed, and some integrated into European programs, without being fundamentally re-evaluated.

The expansion of renewable energies since the 2000s marks a new phase in which climate policy has become a driver of subsidies. The Renewable Energy Sources Act (EEG) was the central lever in this process, its support system triggering massive investments in wind and solar energy, but also noticeably increasing electricity prices for households and businesses. With the transfer of EEG costs to the federal budget and the broad expansion of climate protection programs, subsidies are now closely linked to the transformation agenda for energy, mobility, and industry.

The financial crisis of 2008, the Euro crisis, and finally the energy price shocks resulting from geopolitical conflicts marked further turning points. During these crises, subsidies and tax breaks were used as short-term stabilization instruments – from scrappage schemes and short-time work programs to energy price caps. Some of these crisis instruments have become permanent funding programs, further inflating the subsidy landscape.

The current situation is thus the result of a long chain of political decisions, each combining short-term problem-solving with structural objectives. A systematic, broadly supported political reform of subsidies, critically reviewing the entire existing system, is only taking place in a rudimentary way, for example in the form of recommendations from audit offices, scientific advisory boards, and independent subsidy reports.

Perspective of an ordoliberal reform course

From the perspective of a regulatory, yet pragmatic, economic analysis, a clear need for reform emerges. Subsidies are necessary and sensible in certain areas—for example, in correcting external effects (climate change), in network industries (infrastructure), or during periods of profound technological change (innovation, digitalization). At the same time, however, they must be subject to strict criteria: clear definition of objectives, time limits, regular evaluation, and transparency regarding costs and impacts.

A consistent reform course could include several guiding principles:

• Focus on clearly demonstrable cases of market failure instead of on vague location policy.
• Time-limited subsidies with exit scenarios defined ex ante to avoid path dependencies and political entrenchment.
• Systematic evaluation of all financial aid and tax breaks based on efficiency, fairness and target achievement criteria.
• Reduction of special rules in tax law in favor of broader, simpler and, if possible, distortion-free assessment bases.
• Greater integration of SME perspectives into the design of funding programs, for example through lower application barriers and standardized access routes.

Particularly in the energy sector, it would be sensible to rely more heavily on market-oriented instruments such as CO₂ pricing, technology-neutral tenders, and competitive capacity mechanisms, instead of complex, politically driven subsidy schemes and levy structures. This would make price signals clearer, reduce misallocations, and distribute the burden more fairly.

A comprehensive subsidy cap, as repeatedly discussed in various forms, could accompany such a reform package. This would not involve a blanket slashing of subsidies, but rather strict spending discipline: new subsidies would only be granted if existing, less effective measures were reduced or eliminated. This would allow the overall volume of subsidies to be stabilized or reduced in the medium term without jeopardizing necessary future investments.

Political-economic realities and the role of public debate

Beyond economic rationality, political-economic factors play a crucial role in explaining why subsidy systems expand and are rarely scaled back. Subsidies generate concentrated benefits for specific groups, while the costs are distributed across a broad, less organized general public. Beneficiary groups therefore have a strong incentive to politically defend their advantages, while opponents are usually diffuse and weakly organized.

Furthermore, the media and political debate surrounding subsidies is often selective. Some subsidies—for example, for renewable energies, culture, or social housing—enjoy widespread public support and are rarely scrutinized, even though they are fiscally significant. Others—such as tax breaks for specific business structures or industries—remain largely unnoticed by the public. The impact of such structures on competition, distribution, and innovation is often only discussed within expert circles.

An informed, data-driven, and transparent debate on subsidies could counteract this. Subsidy reports, expert opinions, and investigative reporting—as in the present case—help to make the actual volumes, beneficiaries, and distributional effects visible. Crucially, this should not only generate outrage or simplistic blame, but rather a sober political process willing to dismantle privileges and readjust funding structures.

The particular urgency in Germany lies in the close interrelationship between subsidy policy, the energy transition, industrial policy, and social issues. Decisions about electricity prices, gas-fired power plants, tax breaks, or industrial development are not merely technical details, but directly affect the economic foundation of small and medium-sized enterprises (SMEs), the attractiveness of Germany as a business location, and public acceptance of the transformation. Responsible policy must disclose these connections and provide transparent justifications for its priorities.

Between necessary transformation and a dangerous spiral of subsidies

An analysis of the current landscape of subsidies and tax breaks in Germany reveals a mixed picture. On the one hand, government funding enables crucial future investments in climate protection, energy infrastructure, digital networks, and affordable housing, thus helping to initiate economically and ecologically necessary transformations. On the other hand, a network of privileges and long-term subsidies has become established over decades, distorting competition, encouraging windfall gains, and burdening taxpayers and contributors to an extent that cannot be increased indefinitely in the long term.

The strongest criticism is directed less at subsidies per se, but at their asymmetry: large corporations and financially powerful actors are often the primary beneficiaries, while small and medium-sized enterprises (SMEs) and the broad middle class bear a disproportionate share of the burden through taxes, levies, and prices. The planned levy-based financing of large gas-fired power plant capacities is a current example of how risks are socialized and costs are hidden in complex levy systems instead of being allocated transparently and according to the polluter-pays principle.

A sustainable approach therefore does not require a blanket abolition of subsidies, but rather a consistent restructuring. Subsidies should be strictly aligned with clear, verifiable objectives, time-limited, transparent, and regularly reviewed for effectiveness and side effects. Where market mechanisms and CO₂ pricing are more efficient steering instruments, the state should not dilute them through permanent price supports and exemptions.

This presents Germany with the opportunity to transform itself from a subsidy-dependent republic into a republic undergoing transformation: away from hidden privileges and towards a transparent, targeted, and competitive subsidy policy that takes both ecological necessities and the economic foundation of small and medium-sized enterprises (SMEs) seriously. The debate about which subsidies we can afford – and which we cannot – is therefore not just a fiscal one, but a central question for the future economic and social order.

 

^*1 The year 2016 is a source limitation, not a substantive decision. The FÖS comparative study, which compares fossil, nuclear, and renewable energy subsidies, is methodologically limited to 2016 – hence the cut-off date. However, this does not mean that no further EEG subsidies were paid after that date.

The other figures:

EEG surcharge cumulative 2000–2021: 200.51 billion euros

EEG financing requirement 2024 (federal budget): 18.5 billion euros

Outstanding EEG remuneration until 2041: maximum 26.7–71.8 billion euros – after which most subsidized plants will expire because 80–90% of the total remuneration has already been paid

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Konrad Wolfenstein

Email: wolfenstein@xpert.Digital

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