Germany wants to be climate-neutral by mid-century. This target is technically achievable but requires an all-encompassing transformation of all economic sectors from transport through manufacturing to private households. In a new study commissioned by KfW Research, Prognos, Nextra Consulting and NKI (Institute for Responsible Investments) identified the volume of investment that has to be realized to achieve this target.
The study found that around EUR 5 trillion in climate action investment will be necessary. If this sum is spread out over the years remaining until 2045, the target year for climate neutrality, EUR 191 billion or 5.2% of Germany’s gross domestic product will need to be invested on average each year.
These high amounts come into perspective considering climate action investment comprises investment that needs to be undertaken in any case. These funds “only” need to be increasingly directed towards alternatives that contribute to climate neutrality. The additional climate action investment averages EUR 72 billion annually, or EUR 1.9 trillion by 2045.
The climate crisis is forcing all sectors of the economy to decarbonize, but with different investment requirements. The analysis by KfW Research and Prognos et. al. quantifies them as follows:
- Transport accounts for EUR 2.1 trillion, the largest portion of the required climate action investment. But the actual additional investment required to achieve climate neutrality is a much lower EUR 153 billion, so it will be mainly about redesigning reinvestment that will be upcoming in this sector in any case.
- Energy is the sector requiring the second-highest climate action investment (EUR 840 billion). Many steps have already been taken in the right direction, but the additional transformative requirements nonetheless account for more than half the total investment, which is EUR 396 billion.
- Private households will need to invest EUR 636 billion in climate action measures. Of this amount, around 40% or EUR 254 billion in an additional investment that is mainly required to create a climate-neutral housing stock.
- The manufacturing sector will require a climate action investment of EUR 620 billion. However, more than three-fourths or EUR 462 billion of this is an additional investment because many production technologies involve great effort to be made climate-friendly and the sector has been less the focus of climate action measures thus far. The various segments are affected to very different degrees, however.
- The commerce, trade, and services sector requires comparatively little climate action investment of around EUR 237 billion, and although half of this (EUR 113 billion) constitutes additional investment, it is only around 3% of overall investment in the sector.
Both private and public capital will be needed to meet the high total investment requirements for a climate-neutral Germany by the middle of the century. The public sector needs to step up especially in two main respects: First, it has a role model function which it can exercise, for example, by modernizing the energy systems of public buildings or by converting the fleet of public transport vehicles. Above all, however, it is responsible for creating suitable conditions for private investment.
When we consider that Germany could cover two-thirds of the necessary additional investment simply by eliminating subsidies that harm the climate, it becomes clear that reaching the target in many cases does not mean mobilizing additional capital at all, but rather systematically directing political action and investment activity to the target of climate neutrality. The investment can even be expected to generate moderately positive impetus for economic growth – without even counting the avoided costs of advancing climate change.
Dr. Fritzi Köhler-Geib, Chief Economist of KfW, commented on the conclusions of the study as follows: “Germany will have to invest around EUR 5 trillion to achieve climate neutrality by the middle of the century. That is a massive amount, but it is doable. In order for us to meet this challenge, public investment funds must be used in a targeted manner, and private investment must be mobilized. This offers the opportunity to make Germany more competitive and prosperous and enable it to emerge stronger from the transition. The high investment requirements and the management of the associated risks place equally high demands on the financial markets and the real economy because we need smart and diverse financing tools to fund the transition. But I am convinced that if we join forces we will be able to successfully position Germany for a climate-neutral age.”
