The climate-friendly restructuring of the economy and adaptation to the effects of climate change cost a lot of money. It remains to be seen who will finance investments in climate-friendly technologies, renewable energies, sustainable infrastructure and adaptation measures worldwide. The dialogue forum as part of the Munich Climate Autumn 2024 showed just how complex and multi-layered the search for financiers for climate protection projects is.
"Our climate is a global public good. But responsibility and the ability to invest are unevenly distributed. No country can solve this alone," said Dr Heike Henn, Head of the Climate, Energy and Environment Division at the German Federal Ministry for Economic Cooperation and Development, outlining the problem. For many developing and emerging countries, the first priority is to achieve greater prosperity; in industrialised countries such as Germany, the transformation must be socially accepted. According to the logic of the 1992 United Nations Framework Convention on Climate Change, which is still valid today, the industrialised countries bear the main responsibility and must take on the investments for the developing countries. "However, this overlooks the fact that many of the developing countries at the time, such as China or India, have now achieved a relatively high level of prosperity themselves."
Trillions in investment needed
According to independent studies, Henn put the gap in climate financing at 2.4 trillion US dollars per year. "This affects areas as diverse as the transformation of energy systems, adaptation and resilience, dealing with loss and damage and sustainable agriculture." If the investment requirement is expanded to include the achievement of all 17 UN Sustainable Development Goals (SDGs), the total would even be USD 5.4 trillion. Henn criticised the fact that the 100 billion US dollars per year pledged by industrialised countries from 2020 by public and private donors for climate protection and adaptation in developing countries had only been reached in 2022. This is eroding confidence in international climate policy, he said.
The number of private investors remains below expectations. "Last year, Germany provided 9.94 billion euros for climate financing, of which only just under five per cent came from the private sector," said Henn. The German government is endeavouring to use its funds to leverage more private capital and thus increase effectiveness, for example in the area of green bonds. "For the UN Climate Change Conference COP 29 in Baku in November 2024, I hope that we will achieve a multilateral breakthrough in climate financing similar to the Paris Climate Agreement of 2015 and show that the global community is capable of taking action."
Controversial principle of historical guilt
The search for donors for climate protection always raises the question of fairness and justice. Johannes Wallacher, Professor of Social Sciences and Business Ethics and President of the Munich School of Philosophy, has little sympathy for the ethically problematic principle of historical guilt. After all: "Today's generation is not responsible for past emissions, nor did previous generations know what they were doing." Instead, he argues in favour of focusing on the climate protection capacity of individual countries, which often correlates strongly with cumulative CO2 emissions. "Historical responsibility results from the different distribution of capabilities and does not mean foregoing emissions. Rather, it is about using one's own better capabilities to support others on the way to a sustainable emissions path," says the professor.
Aim for fair burden sharing
For David Ryfisch, Head of the International Climate Policy Department at Germanwatch e.V., damage and losses, such as those caused by extreme weather events, rising sea levels or more frequent droughts, must be given greater focus. "Various studies on the fair distribution of the burden between countries have come to the conclusion that the main responsibility still lies with the industrialised countries. Over time, this picture will shift and countries such as the Gulf states, Russia and China will also have to take responsibility," said the expert. The recently established fund for loss and damage is an important step forward, even if the funds of 700 million US dollars are far from sufficient. "We need to find ways to move into new dimensions here," he demanded.
Mobilising private capital
What can the public sector do to mobilise more private capital? "The state must be prepared to take on more risks. It could provide development banks with guarantees so that they can also finance riskier projects," explained Florian Egli, Professor of Public Policy for the Green Transition at the Technical University of Munich. Private capital can be utilised particularly well in the area of climate protection, but it works less well in the areas of damage or climate adaptation. The most difficult projects to finance are those that do not result in marketable products, such as CO2 storage or investments in biodiversity. Green energies, on the other hand, do not require state guarantees, as such investments are amortised through the sale of electricity.
Price for pollution rights too favourable
Emissions trading is one way of reducing harmful CO2 emissions and at the same time financing investments for more climate protection. The so-called mandatory CO2 market works according to the principle that those who pollute more must pay more. The price of pollution rights, the quantity of which is determined by the state, changes according to demand. So much for the theory, because in practice, CO2 certificates are sometimes far too cheap to have a controlling effect. This is why some climate experts such as Ottmar Edenhofer, Director of the Potsdam Institute for Climate Impact Research, are in favour of setting up a "carbon central bank". This would ensure that the price of certificates does not fall below a certain level.
"There is also the voluntary carbon market, which is used, for example, to offset CO2 emissions from air travel," explained Egli. Here, the funds are generally used for climate protection projects that are located far away from where the emissions are generated. According to Egli, the voluntary CO2 market is not only very small, but 90 per cent of the investments do not deliver the CO2 savings they promise. "For this market to make a difference, certification must function differently and conflicts of interest must be avoided," said Egli. The further away CO2 emissions are offset, the more complex issues of compliance and verifiability become. Furthermore, added Germanwatch climate expert Ryfish, many companies would use the voluntary carbon market to give themselves a green veneer by offsetting their emissions with certificates instead of reducing them themselves. "So-called net-zero coalitions of companies are important," he conceded, "but at some point they reach their limits." This is where the state is called upon to take responsibility for companies that are not prepared to reduce CO2 emissions.
Extend CO2 pricing
"I am against compensation concepts for ethical reasons, because they have an element of indulgence trading in them," Professor Wallacher qualified. Egli added that an extension of the mandatory market to other areas such as the consumer economy or agriculture should be examined in order to broaden the financing basis for climate projects.
Will the upcoming COP 29 climate conference in November bring solutions? "I hope that all countries represented in Baku will come to a viable decision on climate financing," hopes Henn. Germany has earned a lot of trust in the international community and can act as a bridge builder. "In order for Germany to continue to play a leading role in the negotiations, we must not look inwards too much and neglect climate financing, despite the tight budget situation," demanded Ryfish. He would like to see a new ambitious climate financing target of well over 100 billion US dollars as a result for Baku. Innovative financial instruments would become more important in fundraising, for example to include billionaires or sectors such as aviation. "There is great potential to tap into new sources," Ryfish is convinced.
Insurance solutions for climate risks
According to Henn, climate insurance is another topic that the German government is driving forward. Building on the InsuResilience Global Partnership, a Global Climate Risk Shield has been created to pool activities in the field of climate risk insurance and preparedness. This will make it easier and quicker for people and authorities to access the help they urgently need in the event of a disaster. However, insurance has its limits where loss events occur too frequently.
Climate financing is therefore not only an ecological challenge, but also a social and economic one. It will be interesting to see how resolutely the climate conference in Baku will tackle this issue. What is needed is a redefinition of global priorities and a redistribution of resources in the interests of a sustainable future for all.
