A newsletter to help you understand the key challenges of climate finance.
The EU economy produces volumes of greenhouse gasses that are unsustainable in the long run. They cause global warming that is detrimental to human health, causes mass migration, and weather anomalies… We need to invest money today in order to make sure that the economy adopts more environmentally-friendly practices. There is a big gap between what's needed and what's being currently spent for climate action. The good news is that European households can save the day. They have a lot of savings, with trillions of euros sitting idle in bank accounts. Using some of these savings can contribute to filling the gap in climate funding. For example, individuals can invest in EUAs through the EU Emissions Trading System (EU ETS), and can thus support projects that fight climate change. By investing in carbon allowances, individuals have both a positive climate impact and can benefit from financial returns.
The climate investment deficit is the shortfall in funding allocated towards reaching the predetermined climate objectives. It is the gap between the needed financial resources to address climate challenges and the actual investments made. This deficit shows how much progress still is expected to be made to implement sustainable solutions and mitigating the impacts of climate change.
The Institute for Climate Economics computes the climate investment deficit periodically. It uses impact assessments from EU law to quantify energy volumes in GW. Also, it relies on academic and economic literature to project unit costs in € per kW to calculate the total climate investment deficit in €.
According to the Institute for Climate Economics, an annual investment of €813 billion is required to align the European economy with its climate objectives. These investments span across various sectors. However, among the 22 sectors analyzed, only 20 are currently receiving enough funding to achieve the bloc's objectives.
In 2022, €407 billion were allocated for climate action, representing approximately half of the required amount to fulfill institutional commitments. Doubling these efforts is crucial. The funds in 2022 were mostly used for energy, building, and transport systems. Investments in these sectors grew by 9% between 2021 and 2022, reaching the equivalent of 2.6% of the EU GDP.
The sectors requiring environmental funding to close the climate funding gap according to EU institutions are:
European citizens, collectively, possess substantial wealth. By September 2023, households in the Eurozone accumulated net assets exceeding €60 trillion, with savings totaling more than €35 trillion. Over the past decade, households have consistently saved slightly more than 12% of their disposable income every year. An exception of this was during the COVID-19 pandemic when lockdown measures led to increased savings rates of 18.46% in 2020 and 16.4% in 2022.
To bridge the climate investment gap, an estimated €5.7 trillion is required. In 2023, Europeans collectively possess €35 trillion in savings, with approximately EUR 10 trillion remaining sleeping in bank accounts. “Simply” using slightly over half of these dormant savings could effectively address the climate investment deficit issue.
The EU ETS is a significant financial resource for member states, funding climate initiatives fort the general public. Over the years, the volume of the EU ETS auction revenues has grown alongside the increasing carbon prices. In 2023, the EU generated € 43.5 billion EUR (revenues for member states + collective climate funds) from the sale of EUAs. The proceeds from EU ETS auctions support green projects as discussed in previous articles.
It's never too early to engage in the global battle against climate change. 2024 is an especially favorable moment. Recent fluctuations in EUA prices, largely attributed to institutional supply adjustments amidst the Ukraine war and the energy crisis, have brought prices to temporary dip. However, over the long run, carbon prices are bound to go up. With this in mind, 2024 presents an excellent opportunity to invest in carbon allowances.
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