Bundesbank President Joachim Nagel, speaking at the Adam Smith Business School in Glasgow, has outlined what financing the transition to a greenhouse gas-neutral economy could look like. I am confident that our financial system can mobilise the necessary financing, he said. 

Additional financing needs significantly smaller than total investment required

Nagel said that the additional financing needs are likely much lower than the estimated additional investment needs to achieve the EU’s climate goals as defined by the European Commission’s accounting perspective. He explained that this is because not all investments needed economic resources and financing beyond what the economy spends to maintain its capital stock. In many cases, we are replacing fossil fuel-based technologies with greenhouse gas-neutral alternatives. And this requires additional financing only if greenhouse gas-neutral technologies are more expensive or if the capital stock being replaced is not yet fully depreciated.

In a comment to legislators, Nagel stressed that stringently planning the path to greenhouse gas neutrality could minimise the additional financing needs. This was because greater planning security would provide incentives to avoid investments in fossil fuel technologies that may not be fully depreciated before they become non-viable. 

Annual German additional financing needs of about €120 billion

Citing a recent study, Nagel said that Germany would have to invest around €390 billion annually from 2021 to 2030 to reduce emissions by 65 % compared to 1990. However, only around 30 % of this investment requires additional financing. In absolute terms, this amounts to about €120 billion, he highlighted. 

To achieve a greenhouse gas-neutral economy, households, firms and the public sector all need to invest. They can fund these investments using both internal and external sources. In Germany, Nagel said, internal financing – primarily household savings – could account for 20 % of the estimated financing mix for the transition. Bank loans could be the most important external financing instrument, covering over one-quarter. Alongside bank loans, debt securities and equity financing could also play crucial roles, the Bundesbank President concluded. 

Banks may play a larger role in financing the transition

Nagel regards a robust banking system as essential for achieving greenhouse gas neutrality. As the estimates showed, a substantial portion of climate investments fell on households. And households simply do not have many viable alternatives to bank loans, he said. That is why we at the Bundesbank are committed to completing the European banking union.

Similarly, the Bundesbank President stressed the importance of improving access to alternative financing sources: Non-financial firms, in particular, would greatly benefit from better capital market financing. For this reason, the Bundesbank is likewise dedicated to creating a European capital markets union, he added.