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KfW Research
Energy and Environment
Focus on Economics
In this year’s special survey topic, the KfW Municipal Panel addresses climate change mitigation and adaptation as probably the largest transformative task municipalities currently face. The responses returned by cities, communities and districts show that climate action accounts for nearly EUR 3 billion in the core budget and a further EUR 2 billion in outsourced operations, making up around 15% of planned investments. With around EUR 1 billion in the core budget and half a billion in outsourced operations, municipalities are dedicating less than 4% of planned investments to climate change adaptation measures. More than half the municipalities expect climate change mitigation and adaptation investments to rise in the future. However, there are signs that this investment growth will not be sufficient to achieve the climate targets. Furthermore, 51% of municipal treasuries believe the existing funding mix will not be suitable for meeting the higher investment needs. municipalities are making it hard to increase public investment systematically and vigorously.
Economics in Brief
Time is running out. After faltering for many years, the expansion of renewables must finally gather pace. The targets of the German Federal Government provide for an additional 28 GW capacity on average each year over the next eight years alone. That is four times as much as in the past eight years. A recent supplementary survey to the KfW Energy Transition Barometer has revealed: The population is ready for a corresponding acceleration, with 92 per cent of respondents regarding a faster expansion of renewables as important. So it is now important to put the legally enshrined prioritisation of renewables and the intended shortening of planning and approval procedures into practice with determination.
Germans show broad support for the expansion of renewable energy(PDF, 168 KB, accessible)
Focus on Economics
Putting a price on carbon is the most (cost-)efficient policy instrument for directing private investment away from fossil fuel energy to climate-friendly alternatives and thereby set an economically sound and long-term framework for the the necessary clean energy transformation. The introduction of national carbon prices has recently gathered momentum around the world, although there is still great heterogeneity in the pricing levels and coverage of particular sectors. Implementing carbon prices remains a challenge particularly in emerging economies. Bilateral partnerships can have a strong leverage effect on climate policy if they motivate and empower other countries to implement national carbon pricing systems. The urgently needed global coordination of climate policy could then be achievable through a consensus on a minimum price of carbon that is supported by as many countries as possible. The G7 climate club could provide a suitable framework to step up action.
Businesses in Germany invested around EUR 55 billion in climate action last year. However, annual investment volume will need to more than double in order for Germany to reach net zero by 2045. This was revealed by the KfW Climate Barometer, a new business survey which collects data on climate action investments for the entire business sector in Germany for the first time and provides insights into the attitudes and activities of businesses around the implementation of the energy transition. The findings also show that so far, few business leaders have adopted specific greenhouse gas reduction targets and know the carbon footprint of their business. Large enterprises have taken the lead here. Only one in ten businesses so far aims to become climate-neutral. Economic incentives and streamlined planning and approval procedures are major control levers that make the greening of the economy possible.
KfW Research Position paper
Russia’s war of aggression against Ukraine and the COVID-19 pandemic have shaken the foundations of a rules-based world order and the German economic model. Even amid the necessary short-term crisis management, investments are key to successful adaptation to the changed environment. They make restructuring energy supplies and the green and digital transformation possible – and demand a joint effort by government, the business community and private households. The lion’s share of necessary investment will have to come from the private sector. The current burdens from high energy costs and uncertainties act as additional roadblocks. So it is all the more important to encourage and provide intelligent support for private investment. Government therefore has a key role to play: first, by formulating targets and setting frameworks and incentives and second, by investing in infrastructure and human capital, both of which are required for the productive realisation of private-sector activity.
A boost in investment for the transformation – what exactly is needed?(PDF, 220 KB, accessible)
Further information The coronavirus crisis and its impact
Focus on Economics
The transition to net zero and the digitalisation drive will significantly increase global demand not just for bulk metals such as copper but also for special metals such as lithium, rare earths and cobalt. Germany and Europe are heavily dependent on imports of these resources. Extraction and processing of special metals is subject to high supply concentration in individual countries, which for some is higher than for oil and gas production. For the positioning of European businesses in the area of strategic technologies such as lithium-ion batteries and solar technology, China’s strong market power is a particular challenge for the supply of raw materials and for Europe as a technology location in general. Pushing ahead with the circular economy, expanding resource extraction in Europe itself and diversifying international procurement sources are key to increasing the continent’s resource security.
Securing critical raw materials for the net zero and digital transformation(PDF, 295 KB, accessible)
The current gas crisis and the increasingly visible impact of climate change both underscore the need for a more sustainable energy supply. The KfW Energy Transition Barometer 2022 shows that around 90% of households in Germany believe the energy transition is important. At the same time, many have serious doubts as to whether it can be achieved with a fair distribution of burdens between all groups of society. These reservations negatively impact on households' willingness to take action. Nonetheless, around 29% of households are already using energy transition technologies, while a further 13% plan to do so sometime this year. Existing buildings hold particular potential for reducing the consumption of fossil fuels. As lower-income households are most likely to reside in poorly insulated buildings with high potential for savings, financial barriers to modernisation and relevant information deficits must be eliminated here in particular.
KfW Energy Transition Barometer 2022(PDF, 648 KB, non-accessible)
Focus on Economics
The public sector will need to invest nearly EUR 500 billion in order for Germany to become climate neutral by 2045 – or around EUR 20 billion in climate investment each year. The highest amounts to be invested by the public sector will be in energy (EUR 297 billion), transport (EUR 137 billion) and buildings (EUR 47 billion). These amounts can definitely be funded from the public budgets, but even so, they represent a sixfold increase on the current investment level. Unless the responsibilities, financial flows and competences between the federal, state and local government levels are systematically realigned, it will hardly be possible to launch a sustained increase in necessary climate action investments.
Public investment required to achieve climate neutrality in Germany(PDF, 396 KB, accessible)
Focus on Economics
The influence of a rising carbon price on the inflation rate is crucially determined by the amount of avoidance responses in favour of less carbon-intensive goods. The stronger the (intended) avoidance response to fossil price increases, the lower the general inflationary pressure. How inflation will evolve in the course of the climate transition therefore crucially depends on its implementation. Policymakers can contribute significantly to making the transition to a climate neutral economy succeed while maintaining a steady price level overall in the medium to long term, particularly by designing economic and climate policies consistently, efficiently and for the long run.
Green inflation? Between climate action and price stability(PDF, 299 KB, accessible)
Focus on Economics
Germany’s transition to climate neutrality by the middle of the century is a key challenge. As a crucial element of the business ecosystem, SMEs have a particular responsibility. Now for the first time SMEs’ climate action investments can be quantified on the basis of the KfW SME Panel. In 2020, around 460,000 SMEs invested a total of EUR 22 billion in measures that also serve to protect the climate. In other words, roughly one in ten euros invested by SMEs went to climate action projects. Furthermore, three in ten enterprises are planning to increasingly invest in climate change adaptation measures in order to improve their crisis resilience to climate impacts. Larger enterprises and manufacturers generally exhibit greater commitment. This is where the potential for reducing greenhouse gas emissions is greatest. But the services sector will also be crucial for achieving climate neutrality.
The picture of a green economy is becoming increasingly real – ever since China and the US committed to the goal of climate neutrality last year. In future, entrepreneurial success will be possible only on the basis of climate-friendly processes and technologies. Whether Germany will emerge from the imminent upheavals stronger or weaker as an economic hub is as yet unclear. But there are various indicators that can be used for an estimate. Germany continues to be a market leader of green products but international competitors are catching up, particularly in Asia. Targeted measures that support green technologies and address the relevant stage of the innovation process remain important.
Focus on Economics
COP26 is already the 26th attempt by the international community to agree on a global response to climate change. The successes of the past mainly consisted in the joint definition of targets. But the resulting efforts are not sufficient to avoid significant global warming. One lever that can be used to finally make tangible progress is to strengthen the mechanisms of international cooperation on climate action. COP26 provides three key opportunities for this, which have been analysed in a new publication by KfW Research.
COP26 – three opportunities for global cooperation on climate action(PDF, 169 KB, non-accessible)
Focus on Economics
Germany will have to invest around EUR 5 trillion to achieve climate neutrality by the middle of the century. This is the finding of a study conducted by KfW Research. It is an ambitious goal but falls into perspective when we take into account that much of it involves investments that are necessary anyway and now need to move towards a sustainable path. In order for us to meet this challenge, public investment funds must be used in a targeted manner and complementary private investment must be mobilised. If we succeed, we have the opportunity to make Germany more competitive and prosperous and enable it to emerge stronger from the transition to climate neutrality.
Focus on Economics
In the context of the Green Deal, the EU Commission is planning to introduce an import-side Carbon Border Adjustment Mechanism (CBAM) and presented a corresponding draft regulation in July 2021. Its implementation will need to take into consideration the legal framework, implications for trade policy and administrative feasibility. If the EU manages to skilfully take into account the expected impact patterns outside the union and minimise political risks, the CBAM can leverage its international orientation as a strength. Ideally, it would pave the way towards a globally coordinated climate policy.
Focus on Economics
Digitalisation is a double-edged sword when it comes to climate action. On the one hand, digital technologies play an important role in the energy, transport and heating transition – for example by integrating weather-dependent renewable power into the electricity market. On the other hand, growing digitalisation itself is causing higher energy and resource consumption and, hence, greenhouse gas emissions. This is the finding of a study conducted on behalf of KfW Research, which analysed in detail the reciprocal effects between the two megatrends of digitalisation and climate neutrality. Policy guidelines are required both for harnessing the opportunities of digitalisation for climate action and for limiting harmful environmental effects.
Focus on Economics
Electric vehicle uptake in Germany is growing fast. Last year, electric cars already accounted for nearly 14% of all newly registered vehicles and the trend is rising. A special survey conducted as part of the KfW Energy Transition Barometer shows that high-income households in detached single-family homes are currently the main users of electric vehicles. The primary motives for buying an electric car are concerns about climate change and the innovative nature of the technology. The main reasons not to buy one – besides the high price – are reservations about practicability but also doubts about the climate footprint of electric vehicles. In order for the mobility transition to succeed, it will be important to mainstream electric mobility as an attractive option in all groups of society. The relative cost-efficiency of electric vehicles must be further improved, an efficient charging infrastructure developed and information deficits eliminated.
Focus on Economics
With Germany and Europe aiming for climate neutrality, German industry needs to undergo a structural transformation to become greenhouse gas-neutral by 2050. The transformation is technically feasible. But implementation is a great challenge given the need for investment in new production processes and the additional renewable energy and green hydrogen production capacities that have to be created. At the same time, the greening of the economy provides considerable opportunities for future value creation and employment. In order for the technologies required for the decarbonisation of industry to achieve broad market penetration, policy frameworks and financial incentives need to be put in place. Compensation mechanisms for energy-intensive businesses that compete internationally (protection from carbon leakage) will increase acceptance of the transformation.
Focus on Economics
The COVID-19 pandemic has deeply affected and unsettled Germany’s enterprises. To be sure, most enterprises rest on a solid financial foundation. The current situation, however, is making it difficult for businesses to make the necessary investments to tap into growth areas in the transition to a digital and climate-neutral economy. But such investments are very important for them to grow out of debt and secure prosperity in the future. The coronavirus crisis has already thwarted the investment plans of many small and medium-sized enterprises. Companies expect to invest almost EUR 40 billion less than last year. That is why economic policy must also seize the moment to create the framework, provide incentives for investment and lead the way with start-up finance to make future growth possible in these two key areas.
Economics in Brief
Greenhouse gas emissions in the building sector have already dropped by more than 40% since 1990. But under the Climate Protection Act, today’s emissions must fall by another 43% by 2030. That will not just require a sharper increase than in the energy, manufacturing and transport sectors. It also means that the annual reduction rates have to more than double again. The sector therefore continues to face major challenges and must focus even more strongly on the existing building stock and non-residential buildings. In addition to targeted support, a rising CO2 price in particular can help make greenhouse gas emission reduction measures more economically attractive.
Climate neutrality: Energy efficiency of buildings remains crucial!(PDF, 102 KB, non-accessible)
Economics in Brief
Climate action scenarios for Germany show that the goal of reducing greenhouse gas emissions by 95% and more will require the use of green hydrogen and its derivatives. However, the challenges for broad market penetration are still huge.
Focus on Economics
International shipping releases more CO2 emissions than all of Germany. Already today, however, there are enough viable technological solutions to prevent this. Many stakeholders are also aware of the problem and going new ways. But many conditions pose a challenge, such as inadequate legal frameworks. Still, the momentum that can be observed in some segments of maritime shipping can teach very valuable lessons.
Climate action in shipping is very similar to global climate action but the stage is much less complex. In this sense, maritime shipping can be seen as a laboratory in which new solutions are developed and trialled. This Focus puts a spotlight on this aspect and discusses selected strategies for new avenues.
Sustainable maritime shipping and climate action(PDF, 225 KB, non-accessible)
Focus on Economics
The analysis of the current state of SDG reporting by banks shows:
- Most of the analysed banks are now involved with the topic of SDGs (Sustainable Development Goals)
- However, so far less than one third of the analysed banks have created actual transparency across their portfolio.
- Fewer than 10% of the analysed banks are already applying SDG-related KPIs (key performance indicators) and reorienting part of their business activity towards sustainable financing
The Sustainable Development Goals – SDG reporting by banks(PDF, 547 KB, non-accessible)
Focus on Economics
The unabated growth of global resource consumption is the main cause of global climate change and biodiversity loss. At the same time, competition for scarce commodities is intensifying. In the face of these challenges, the shift to a circular economy is expected to help make economic management sustainable and competitive. The aim is to design entire production systems in the form of closed-loop cycles that minimise waste and emissions. Under the ‘EU Action Plan for the Circular Economy’ of 2015, the European Union provides clear impetus for advancing the transition to a more circular economy in Europe. Germany is one of the recycling pioneers in the EU. But with respect to waste avoidance, recycling-friendly product design and material efficiency, Germany still has great development potential – as does all of Europe.
The circular economy – pivotal to sustainability and resource security(PDF, 404 KB, non-accessible)
Focus on Economics
The energy price system is in urgent need of reform to enable an efficient energy transition in Germany. Adequate incentives for low-emission technologies cannot be set without uniform CO2 pricing in all sectors. The price distortion is hampering the sector coupling and integration of renewables.
Experts have engaged in a multi-year discourse that has now led to a very broad consensus. The common objective is to adopt a CO2-oriented reform of energy price components set by the state that takes into account redistribution effects. A number of robust expert opinions are now available that outline clear recommendations for action. However, implementing these recommendations requires a strong political will and commitment to climate action.
Focus on Economics
Although measures have been initiated and progress has been made in individual areas, the necessary trend reversal in biodiversity loss has not yet been achieved – neither globally nor in Germany. This development poses a threat to the economies, food security and quality of life of people all over the world. Humankind depends on well-functioning ecosystems. Nature makes numerous ecosystem services available, such as fertile soils, food, natural medicines, drinking water and clean air. It regulates the climate and provides recreational opportunities for humans. The economic benefits of an intact natural environment are often not sufficiently recognised. In order to be able to stop the loss of biodiversity, more nature conservation areas are necessary. Crucially, however, production, consumption and agriculture also need to be made sustainable.
Biological diversity – why it is so important(PDF, 327 KB, non-accessible)
Publications from previous years can be found in our Download Centre or by using our Search.
