Climate finance: resources for low-carbon, climate-resilient Europe

Europe needs to invest substantially in climate change mitigation and adaptation. Estimates of the actual amounts needed vary significantly and, depending on the scope, scale or methodology, can amount up to hundreds of billions of Euros per year. Compared to the overall financing capacity of the finance system, these investments needs are relatively small. Yet, despite its extensive capacity, the finance system currently meets only a fraction of the investment need.

The main challenges for boosting climate-friendly investments include, among others, overcoming existing barriers and lock-ins in the finance system which prolong and promote unsustainable activities; and redirecting funds towards initiatives that boost climate resilience and reduce carbon emissions. For coherent and effective measures on the ground, investment needs should be addressed in a systematic way at all levels — European, national and local. Coherent and complete disclosure of climate risks by companies is a pre-requisite for making informed investment decisions. In addition to improving transparency on climate risks, long-term planning and commitment also send clear signals to investors.

Clear policy signals facilitate long-term investments

The 2015 Paris agreement has set the global objective to ‘make all financial flows consistent with a pathway towards low-emissions, climate-resilient development’. This objective was also confirmed by the 2016 climate change conference in Marrakesh.

The clean energy package, recently proposed by the European Commission, confirms the EU’s commitment to a low-carbon and climate-resilient transition. The package expounds the target of at least 40% cut in greenhouse gas emissions and proposes the targets of at least 30% for energy efficiency and of at least 27% for renewable energy by 2030. It also highlights the important role that investments in clean energy transition and their economic co-benefits. According to the European Commission, by mobilising up to EUR 177 billion of public and private investment per year from 2021, the proposed package can generate up to a 1% increase in GDP over the next decade and create 900 000 new jobs.

The EU policy framework and targets are in general implemented through strategies and concrete actions in the countries, including the national Low Carbon Development Strategies. A preliminary assessment of these strategies by the EEA shows that they vary considerably in scope and depth as well as ambition level. They include very limited information on financing needs and plans to redirect investments. Moreover, a long-term vision at national level in line with EU’s decarbonisation targets is often lacking. Similarly, many countries have also adopted national adaptation strategies and action plans, but details on financing these are often not available. To strengthen investors’ confidence, the Low Carbon Development Strategies and national adaptation plans should be complemented with national climate financing strategies.

Public sector investments will not be enough for financing the transition but can help mobilise and leverage private capital, which is indispensable for redirecting investment at the scale needed. At least 20 % of the EU’s 2014-2020 budget is earmarked to climate-related action. The EU’s recent decision to extend and increase the European Funds for Strategic Investments and the recently established high level group on sustainable finance are also important steps towards building a finance system fostering sustainability in Europe.

Finance system to offer innovative solutions

Climate financing strategies require the involvement of different stakeholders — public and private — at all levels, including the local level. The finance system also needs to evolve to cater to different types of needs and different sources.

Some European municipalities have already come up with innovative ways to fund their actions by combining different funding sources or developing new ones such as crowdfunding of climate bonds. According to our upcoming assessment, however, many municipalities still face difficulties to find finance for their climate adaptation actions. The lack of capacity and expertise in finding sources and applying for the most suitable type of finance poses an important barrier among others. Moreover, in many cases, climate adaptation measures are not yet considered as ‘profitable investments’ by financial decision-makers.

Increasing awareness of climate risks and of the additional benefits of adaptation measures (e.g. boosting quality of life and the attractiveness of the place benefitting from such measures) might result in a different assessment of what constitutes a good investment.

EEA and climate finance

Given the vital role of climate finance in making the necessary transition happen in Europe, the EEA is working towards assessing the connections between current and future actions for mitigation and adaptation on the one hand, and the finance and fiscal systems on the other. A greater understanding of these connections is a prerequisite for removing barriers to climate finance and redirecting funds to support low-carbon climate-resilient transition. We will be sharing our findings throughout 2017.

Hans Bruyninckx
EEA Executive Director

The editorial published in the EEA Newsletter 04/2016, December 2016