Redirecting financial flows
The Paris Agreement sets three long-term goals: limiting global warming to 1.5°C, implementing climate adaptation measures, and “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (Article 2.1c of the Paris Agreement). To achieve the first two goals, it is clear that global financial flows, both public-sector and private, need to be aligned accordingly.
To bring global financial flows in line with the goals of the Paris Agreement, investments that harm the climate must be halted and financing for areas supporting the transformation increased. The key tasks include designing framework conditions that mainstream climate action and factoring climate risks into investment decisions. This involves increasing the promotion and volume of green and sustainable finance and reducing both public and private sector subsidies and investments harmful to the climate. On issues of sustainable finance, the Federal Government receives advice from the Sustainable Finance Advisory Council. The BMWK also supports the creation of framework conditions that allow for transformative investments, redirect financial flows and promote green and sustainable finance in developing and emerging countries, e.g. as part of the International Climate Initiative (IKI) project 30-by-30 Zero, which aims to increase the share of green financing across four countries through the International Finance Corporation. Implementing Art. 2.1.c of the Paris Agreement also includes reducing financing for activities that are harmful to the climate. Underlining this commitment, Germany signed the Statement on International Public Support for the Clean Energy Transition at COP26.
International climate finance
The goals of the Paris Agreement as a whole can only be achieved through significantly scaling up future proofed investment. Public funds are crucial but are not sufficient alone to implement this fundamental economic transformation. They are however essential in supporting developing and emerging countries in their climate ambitions and can also serve as a catalyst for mobilising private funds, depending on the activity and financial instrument involved.
Industrialised countries have pledged to collectively provide US$100 billion per year from 2020 to 2025 from a wide range of sources (public and private, bilateral and multilateral) to finance measures to reduce emissions and adapt to climate change in emerging and developing economies. According to surveys by the OECD, the annual target has been met for the first time in 2022 (in 2022, approx. US$115.9 billion). In addition, developed countries have committed to collectively doubling their shares of adaptation finance up to 2025 compared with 2019 levels to achieve a balance between mitigation and adaptation in the provision of scaled-up financial resources. A new international climate finance target, the so called New Collective Quantified Goal on Climate Finance, is to be determined for the time after 2025.
The pledge reaffirmed by Federal Chancellor Olaf Scholz to increase Germany’s international climate finance to at least an annual €6 billion by 2025 was reached in 2022. In 2022, the Federal Government provided a total budget of around €6.39 billion towards international climate financing. Beyond federal budget funds, the Federal Government also provided publicly mobilised climate finance (loans through KfW and DEG) amounting to €3.09 billion in 2022, as well mobilising private funds totalling €479 million. Including these market resources and mobilised private resources, Germany’s climate financing in 2022 totalled approx. €9.96 billion. In addition to the Federal Ministry for Economic Cooperation and Development (BMZ), the International Climate Initiative (IKI) makes a significant contribution to this in particular.
Private capital mobilisation
The Federal Government strives to raise the level of private investment for mitigation and adaptation measures in emerging and developing countries through the use of public funds. This especially includes blended finance to reduce the hurdles and risks for the private sector in projects under the International Climate Initiative (IKI).