In Germany, one billion euros of government money go a long way
One of the major themes coming out of Doha at the UNFCCC Conference of Parties last week was the role of climate finance. Basically, if we want to reduce emissions and scale up renewable energy and energy saving measures, we need to figure out where the money to do these things will come from.
With public budgets strapped, this challenge increasingly becomes about how we can direct limited public funds to unlock private investment in a targeted, effective way.
In Germany, a recent CPI study showed that 1.5% of GDP, or 37 billion Euros, is invested in climate-related activities like renewable energy and energy efficiency. More than 95% of that investment comes from businesses and households. This small share of government spending is striking. However, it would be wrong to conclude that the government plays no role.
What’s happening, instead, is that the German government has targeted policies in place which seem to make it very attractive for the private sector to invest.
In fact, 43% of German private investments took advantage of low-interest loans from public banks like KfW, who receive funding from the government to buy down the interest rate, and whose loans are backed by state guarantees. While businesses and households ultimately are responsible for footing the bill, by injecting a small amount of targeted money into such concessionary loan programs, government is able to make it possible for large numbers of German investors to pay for these renewable energy and energy efficiency projects.
Additionally, the feed-in-tariff, which guarantees a payment for renewable energy produced through the pre-existing utility system, allows risk-averse investors to plan on predictable revenue streams. This is achieved without any government funds. It is paid for by households and small and medium enterprises via their electricity bills. Industry is largely exempted.
So, while one billion euros seems to be going a long way, are all German government climate programs as effective as they could be? Probably not. The next task is to analyze to what extent these public incentives have really driven private investment, and where they could be improved further.