UPDATE 2-Merkel's Bavarian allies call for German climate bond

Germany's Christian Social Union (CSU), the sister party of Chancellor Angela Merkel's Christian Democrats (CDU), is planning to launch a climate bond to help fund its efforts to reduce emission targets.

"Climate change needs billions of euros of investment in climate-friendly technologies," Alexander Dobrindt, a senior lawmaker from the CSU Bavarian party in Merkel's coalition, told the weekly Bild am Sonntag. "That's why we're planning to incentivize and reward citizens' investment in climate protection via positive interest rates. For that reason, we are planning to launch a climate bond with a return of 2% a year guaranteed by the state which runs until 2030."

If approved, the bond would have to be issued by German state bank KfW. Jakob von Weizsaecker, a senior member of the SPD, the junior partner in Germany's conservative-led coalition, voiced his skepticism over the proposal on Twitter, saying the government should raise environmental spending rather than support artificial yields.

"Does it make sense for the state to intervene in the interest rates market? After all, negative interest rates are a sign that investment is too low and that too much is being saved," he wrote. Germany plans to cut CO2 emissions by 40% until 2020 compared with 1990 levels, and by 80-95% by 2050. It also plans to spend at least 40 billion euros ($45 billion) in regions affected by a planned exit from coal-fired power generation.

A senior government official told Reuters earlier this month that Germany is considering ditching its balanced budget policy to help finance a costly climate protection program with new debt. Germany's Finance Minister Olaf Scholz, in a tweet on Sunday, said leading members of the Social Democrats SPD party would meet on Sunday to prepare for the upcoming weeks, singling out climate protection as a key topic.

"We need to take decisive steps with regard to climate protection in order to prevent climate change," he said, adding that he also could result in a stimulus to the economy. His remarks come ahead of a Sept. 2 meeting of conservative and social democratic leaders aimed at preparing a far-reaching package of climate protection measures expected to massively weigh on Germany's federal budget.

Also Read: FACTBOX-'Debt brake', 'black zero': Germany's fiscal rules under scrutiny