KfW Research
Sustainability and Green Economy
Papers and proceedings on economics
In view of the continued rise in global carbon dioxide (CO2) emissions and insufficient efforts to reduce fossil fuels, there is a threat of significant economic losses, which could lead to an estimated 19% decline in global income by 2050. Carbon dioxide removal (CDR), as a new pillar of climate policy alongside traditional strategies – adaptation and mitigation – is crucial to address the temporary temperature overshoot. However, the financial requirements for scaling up CDR technologies are enormous and must be addressed promptly. Against the backdrop of COP29, KfW Research and the Potsdam Institute for Climate Impact Research outline five key areas of action to drive market adaptation, innovation and international cooperation in the field of CO2 removal.
Further informations on COP29
Further informations on climate neutrality
Focus on Economis
A recent analysis of the KfW Climate Barometer revealed that in the year 2022, 4.3% or approx. 160,000 private-sector firms in Germany invested in the generation and storage of electricity or heat from renewable energy sources. That was significantly more than in the previous year. The increase in fossil fuel prices caused by Russia's war of aggression against Ukraine has made investment in renewables more attractive.
More than half of firms (54%) in Germany were already using electricity from renewables. But only one in ten businesses was using heat from renewable energy. Both electricity and heat from renewables are more common in larger enterprises than in smaller firms. The provision of heat in industry and commerce is still largely based on burning fossil fuels. That is why it is now necessary to place a stronger focus on the decarbonisation of industrial process heat supply.
Focus on Economis
This study describes the regional diffusion of household photovoltaic systems in Germany. By the end of 2023, one in eight residential buildings was equipped with such a rooftop solar system. Germany needs to continue accelerating the increase in installed capacity to meet the climate targets. This is important because, among other things, household photovoltaics (PV) generate electricity on site and households can consume it right away, easing the load on the power grid. However, not all regions are equally suitable for PV.
Global radiation determines how much electricity a PV system can generate. Considering the regional global radiation, the following regions currently hold great potential for household PV: Bremen, Hamburg, the Saarland, Mecklenburg-Western Pomerania, the region around Dresden, Schleswig-Holstein, the regions around Lüneburg and Trier, parts of Upper Bavaria, Thuringia and southern Hessen.
Information offerings and advertising campaigns by suppliers of PV can be particularly promising to speed up diffusion in these regions.
The potential for household photovoltaics in Germany(PDF, 3 MB, accessible)
Further analyses on the topic of climate neutrality
How Development Finance Institutions Can Build Bridges to Unlock Private Capital
Global decarbonization and climate adaptation requires trillions of dollars of annual investment, most of it from the private sector. To achieve the goal of limiting global warming global climate protection investments must increase by at least 30% annually – three times faster than before. Development finance institutions (DFIs) are seen as key mobilizers of these flows, catalysing private financing in particular. A joint paper by BCG and KfW provides a big-picture perspective on how DFIs are innovating and evolving in sync with their ambitious climate financing goals. Along several dimensions – from the business and operating models to the necessary regulatory and policy framework – this paper explores how development and promotional banks globally can make a valuable contribution to closing the looming financing gap.
Despite the economic uncertainties caused by the energy crisis, investment by German enterprises in domestic climate action grew by a sizeable 18% in real terms in 2022, reaching EUR 72 billion. These are the findings of the 2023 KfW Climate Barometer. Investment in climate action is likely to have been boosted not only by the sharp rises in fossil fuel prices, which made investments in energy efficiency and the use of renewables more attractive, but by pull-forward effects resulting from the foreseeable increases in the cost of debt capital and rising prices for capital goods, particularly in the first half of 2022. The growth in climate protection investments last year was attributable to larger companies and SMEs with 10 or more employees. The findings also show that nearly two thirds of German companies have at least partly enshrined climate action in their business strategy. However, there is still upside potential for operationalisation. So far, 70% of businesses have not yet developed any concrete plans to reduce greenhouse gas emissions.This applies to small and medium SMEs in particular.
KfW Climate Barometer 2023(PDF, 540 KB, accessible)
Further information of the KfW Climate Barometer
Economics in Brief
At the 28th UN Climate Change Conference (COP28) at the end of November, the first Global Stocktake (GST) process will assess progress made on climate action that was established in the Paris Agreement. Efforts to date have not been sufficient to achieve the global climate targets but there are promising approaches as to how a course correction can be made. These include the expansion of renewable energies on a broad basis, technological progress and innovation. Funding for the global target of adapting to climate change is also falling short of requirements. Here, an increase in international adaptation financing, more effective use of funds and the mobilisation of private capital are necessary building blocks for closing the gap. Finally, the urgently needed boost in international climate financing in emerging and developing countries has a decisive role to play. Transparency and global coordination are the unifying elements of all these issues.
COP28 Climate Conference: High time for a course correction and new avenues(PDF, 203 KB, accessible)
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
The Annual Economic Report 2022 of the German Federal Government recommends focusing more rigorously on the consequences of economic activity, particularly for the environment and climate. We propose a simple approach for systematically integrating the expected greenhouse gas emissions into our economic forecast for Germany. It currently indicates that greenhouse gas emissions will drop in 2022 and 2023, albeit less than intended. The approx. 38 million t CO2 equivalent in average annual emissions exceeding the target level are practically equal to the total GHG emissions of Slovakia in the pre-pandemic year 2019.
GDP forecasting and greenhouse gas emissions – an integrated approach(PDF, 214 KB, accessible)
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)
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
The impact of the coronavirus pandemic has hit the entire SME sector. A current study shows which groups of enterprises get through the crisis more easily and which ones struggle. KfW Research has published a position paper proposing economic policy measures so that Germany emerges stronger from the crisis. The coronavirus crisis has had a significant impact on the SME sector. The current study by KfW Research reveals that the crisis has not impacted all SMEs in equal measure but affects individual segments more than others. Small businesses, internationally active companies and enterprises that already had a weak credit rating in particular suffered declines in their equity ratios. By contrast, enterprises whose credit rating indicates well-developed management skills exhibit greater crisis resilience, as do those that carried out innovation and digitalisation projects already before the crisis.
Despite the fact that incidence rates are rising again, the vaccination programme and the risk-based relaxation of the containment measures offer hope that Germany will get on top of the coronavirus pandemic in the foreseeable future. Accordingly, questions about what happens next are coming more to the fore. At the same time, we are able to better assess the size of the challenge involved in transforming to a resilient, digital and climate-neutral economy. The need to change course is becoming ever more urgent if we are to make Germany future-proof. We see the greatest need in five key areas of action: Crisis resilience, climate neutrality, digitalisation, globalisation and Europe. A targeted approach is necessary in order to harness the crisis-management momentum for the change of course towards sustainable recovery. The aim of this paper is to highlight specific intervention points for solutions within the areas of action already identified.
KfW Research Position Paper August 2021(PDF, 241 KB, non-accessible)
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
Transitioning municipal public infrastructure to climate neutrality requires high investment amounts which can hardly be funded from current budgets. The international capital market provides sustainable finance but municipalities have so far hardly tapped into this funding source because the customary capital market instruments are not suitable for many municipalities. Alternatives that are based on established instruments such as municipal loans are therefore necessary. However, in order to enable green municipal loans to achieve a breakthrough, further changes and pioneers will also be required in municipal finance.
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.
The economic crisis from the coronavirus shock is unprecedented in the speed of its spread, its depth and global scale. Because of high uncertainty, a lasting recovery is particularly difficult and will depend mainly on meeting three key challenges: First, the business sector can be expected to incur higher debt, which will adversely impact investment activity. High loan losses and low earnings are putting increased pressure on banks’ equity positions, reducing credit supply. Second, the coronavirus pandemic has accelerated the implementation of short-term digitalisation and innovation projects. More long-term, in-depth projects, however, are at risk of being put off for lack of funds. Third, climate change demands structural adjustments in all areas of the economy which must be addressed quickly and decisively regardless of financial constraints.
Where to from here? The crucial next steps in the coronavirus crisis(PDF, 214 KB, non-accessible)
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
Compared with other EU countries, Germans spend a lot of money on housing. However, almost one third of private households, including many low earners, do not see their housing costs as a financial burden. And the share of households that perceive their housing costs as a heavy burden is significantly lower, at 13%. The main reason Germans do not see housing as a higher cost burden than the EU average is most likely the fact that they have more income at their disposal after paying for housing than households in most other EU states. The high housing costs thus reflect Germans’ high standard of living. But there are countries in which substantially more low earners do not feel under stress from their housing costs – notably Denmark and Sweden.
How do Germany’s housing costs compare with the rest of the EU?(PDF, 189 KB, non-accessible)
Focus on Economics
The debate about rising rent costs suggests that in many places rents are no longer affordable for low earners. Across Germany, however, rents have risen at slower rates than incomes in recent years. Consequently, the housing cost burden has fallen for low earners as well. But people who are looking for a home in booming conurbations are paying much more. These are the findings of an analysis for Berlin and Frankfurt. Policymakers can take effective action to limit excessive rent burdens. Historically, experience shows that capping and largely freezing rent increases is not advisable because it crowds out investors and reduces investment. In the long term, this leads to a decline in the quality of rental housing and creates a rental housing shortage.
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
How well are Germans really doing? The social market economy has come under criticism. It is claimed that the fiscal burden is weighing on growth, inequality is too high and the economy is poorly equipped to meet future challenges. KfW Research has examined whether this criticism is justified. The results of the analysis show that Germany stands out positively also among the industrialised countries with regard to prosperity, income equality and social security. The need for reform therefore arises not so much from the condition of the country’s social market economy, rather we must make it fit for the future. The most important future issues include maintaining the labour supply despite demographic change, strengthening unity in the EU and cooperation in global trade, digitalisation, climate action and sustainable growth. The study indicates possible courses of action.
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 need for climate action and environmental protection requires German municipalities to invest large sums in infrastructure as well. Municipalities are already deploring a significant backlog of investment and it is unclear how they can finance the necessary investments in enhancing sustainability. Green bonds were developed as a financing instrument to meet this challenge but are almost unknown in Germany’s municipalities. In order for this to change, a number of conditions have to be fulfilled.
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)
Focus on Economics
In 2017 there were around 154,000 ‘young’ social entrepreneurs with 108,000 social enterprises in Germany. That was a share of 9% of all young entrepreneurs. Besides seeking to make a profit, at the very top of their target system is a particular social or ecological concern for which they forgo possible returns. In addition, they also like to break new ground. Just under one third of ‘young’ social entrepreneurs offer new-to-market innovations that were previously unavailable in their target market and one in four develop technological innovations of their own to market readiness. That makes many social entrepreneurs pioneers of sustainable economic development. The share of social entrepreneurs is above average among older business founders. They show that it is possible to realise new plans even at an advanced age and that should be welcomed in the face of demographic change. Social entrepreneurs are more likely to be unsure about having the required business skills, so they should be supported in acquiring such skills.
Publications from previous years can be found in our Download Centre or by using our Search.
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