The document was signed on the sidelines of a Nato meeting in Brussels. Both countries already in February last year signed a green defence deal, with the grand duchy pledging €1.2m for clean-up operations.
And in 2017, Luxembourg co-funded the construction of military barracks used by Nato troops in Latvia.
The agreement signed on Thursday runs until 2024 and puts an environmental stamp on Luxembourg’s defence spending. The country is also refurbishing its military barracks in Diekirch to reduce its carbon footprint as well as replacing civilian vehicles with electric models.
Nato has recognised climate change as a global security threat, as it fuels conflict but also impacts Nato operations.
Bausch (Déi Gréng) last year said Luxembourg is lobbying for money spent on the environment to be recognised as defence spending as it will help prevent future conflicts.
Luxembourg is well below the 2% of GDP defence spending target by Nato members, with expenditure around 0.6% last year and plans to raise this to 0.72% by 2024.