Methodologies, data requirements and data availability to assess capital flows and investment needs

Methodologies, data requirements and data availability to assess capital flows and investment needs to finance the EU Green Deal

Climate & Company Stefanie Berendsen Amanda Schockling Louise Simon Ingmar Jürgens Oliver Herrmann

This study is part of the project „Financing Europe‘s Green Recovery“ funded by Agora Energiewende 31.03.2022

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IF WE ARE SERIOUS ABOUT SUSTAINABLE DEVELOPMENT, WE NEED TO GET THE FINANCING RIGHT.

Sustainable Finance Think Tank

climateandcompany.org hello@climcom.org

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Agenda 1. Outlining existing methodologies to a.

Track climate-related capital flows

b.

Assess investment needs and gaps (National Energy and Climate Plans)

2. Illustrating data requirements versus data availability to assess investment needs and gaps to deliver the EU Green Deal (with examples from Czechia)

3. Mapping links between methodologies to assess investment needs to deliver the Green Deal and the EU fiscal framework

4. Insights and conclusions

Corresponding author: Stefanie Berendsen - stefanie@climcom.org

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Three steps to develop strategies to close investment gaps

1 CLIMATE FINANCE LANDSCAPES -

Tracking and mapping life-cycle of capital flows based on (historical) data

2 INVESTMENT NEEDS ANALYSIS

Modeling and assessing investment needs (order of magnitude)

3 INVESTMENT GAP ANALYSIS

Assessing the difference between current/planned and required investment levels

REFORM & Closing the investment gap

CAPITAL RAISING

STRATEGIES

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1. Outlining existing methodologies a. Tracking climate-related capital flows •

Stocktaking of existing methodologies

•

Example: Climate finance map of Czechia

b. Assessing investment needs and gaps (examples from NECPS)

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1A. Tracking climate-related capital flows Stocktaking exercise - tracking and mapping climate-related capital flows

1 A Tracking and mapping climate finance flows Climate finance landscapes of capital flows passing through •

How much has been invested in a specific timeframe?

•

What is the split between public and private investors?

•

What types of investment/end uses are financed?

•

What intermediaries and financing instruments were the most common?

several dimensions of the financial value chain: 1. Sources of capital (public or private) EU budget, government budget, corporate actors or households 2. Intermediaries who facilitate these flows Government actors, public financial institutions, commercial financial institutions 3. Financial instruments Grants, loans, debt or equity

4. Recipient sectors of the capital Energy, buildings, transport, industry, agriculture or others

1A – Tracking capital flows

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1A Climate finance landscapes Climate finance maps available for:

• • • • • • • •

Germany (2016) Belgium (2013) France (2020) France (2016) Czechia (2017) Latvia (2018) Global level (2019/'20) EU (2017)

Juergens, Amecke et al. "The Landscape of Climate Finance in Germany" Climate Policy Initiative (2012) 1A – Tracking capital flows

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Quick overview: Key findings climate investment maps / tracking exercises Country & year mapped

Abbrv.

Germany (2010)

DE’10

Germany (2016)

DE’16

Belgium (2013)

BE’13

France (2020)

FR'20

France (2016)

Sectors covered

Tangible vs. intangible

Public vs private

Author

Only tangible

95% private, half supported by concessionary

Juergens et al. (2012)

Only tangible

83% private (corporate actors dominate) 17% public (national budget largest share followed by EU)

Novikova et al. (2019)

Tangible and intangible

66% private, 34% public

Rademaekers et al. (2016)

Above, excl. agriculture

Tangible

No differentiation made

Ledez et al. (2021)

FR’14

Energy, buildings, transport, industry, agriculture

Tangible

64% private (households and private companies), 36% public

Hainaut et al. (2017)

Czechia (2017)

CZ’17

Energy, buildings

Only tangible

59% private, 41% public

Valentová et al. (2019)

Latvia (2018)

LV’18

Energy, industry, buildings

Only tangible

29% private, 71% public (42%-point EU + 29%point national budget)

Kamenders et al. (2019)

Global (2019/2020)

Global'20

Energy, buildings, industry, water, land use

No specific mention of (un)tangible

49% private, 51% public

Buchner et al. (2021)

EU (2017)

EU'17

Energy, buildings, transport, agriculture, industry

Tangible and intangible

65% private, 35% public

Eichler et al. (2017)

Energy, industry, buildings, transport, forestry, agriculture, waste management

NB: maps follow different methodologies, dealt with different data availabilities and sectors and are therefore not directly comparable 1A – Tracking capital flows

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Tracking climate-related capital flows • Coherent, reliable and comparable climate tracking methodologies • Important to support the assessment of climate investment needs and gaps • Develop understanding of which indicators play a role on the measurement of climaterelated/climate-aligned capital flows

• Assess which data are currently available and which will require additional disclosure from Member States • Relevance for the debate around EU fiscal framework • Results of investment needs and gaps assessments could play an important role (e.g., quantification of maximum/minimum level of investment exempted from EU fiscal rules) • Requires verifiable and reliable assessment

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State of play: Tracking climate-related capital flows Comparison of assessment of capital flows and/or investment needs from a number of recent studies (see table slide 8): • What kind of investments are considered in each methodology?

• E.g. Tangible vs. intangible investments

• Which climate/energy/sustainability objectives are considered?

• E.g. Climate mitigation, climate adaptation, other

• Which economic sectors are covered?

• E.g. industry, energy production, agriculture, etc

• Which sources, intermediaries and instruments are tracked?

• E.g. public vs. private

• Which data availability issues are typically faced?

• E.g. for certain sources of finance, sectors, etc.

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The range of investments/expenditures Tangible investments

Intangible investments

Gross fixed capital formation (GFCF):

Non-physical assets for productivity gain

Commonly used: Eurostat definition - expenditures to acquire physical assets, such as buildings and energy infrastructures.

(Eurostat, 2013)

Commonly used: various international statistical standards (United Nations, 2016 ; European Commission, 2011)

Some studies (IKEM ‘19 and Valentová ‘19) expand the definition to include: •

Durable goods purchased by households (which typically does not fall under GFCF): •

E.g. road vehicles purchased by households

•

Research & Development (R&D)

Expenditures on: •

Education

•

Training

•

Awareness raising

•

Support for development and implementation of policies

•

Capacity-building measures

Examples:

Examples:

Energy infrastructure, renewable energy installations, building retrofits, etc.

Energy audits, information campaigns promoting energy efficiency, R&D into next generation batteries

Challenge: Differences in definitions can pose challenges when attempting to aggregate data on a European level and compare or combine figures

Challenge: Category excluded in most reports due to lack of data

FR'20; DE'16; BE'13; EU'17; CZ'19

BE'13; EU'17

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Other key investment dimensions and definitions considered Temporal dimension: occurred vs. planned

Type of investment: total versus incremental

Occurred (disbursed) investment vs. investment that was planned or committed for any given year

Total capital investment: full cost of a technology or practice

Key challenges: •

Distinction between disbursed and committed (for public expenditure)

•

Time lag of investment statistics (public and private),

•

Investment spending is volatile in general and information on investment is usually attached with a high margin of uncertainty

1A – Tracking capital flows

Example: renewable energy generation and related transmission grids and distribution networks

Incremental investment: additional expenditure necessary to create a new asset or an equivalent asset in a manner different from the business-as-usual practice Example: Thermal efficiency in new and existing buildings

Key challenge: incremental approach offers realistic picture, but difficult / lack of data to define “business-as-usual practice”

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Range of objectives covered Climate mitigation

Climate adaptation

Other objectives and categories

"Contributing to reducing or avoiding GHG

"Activities aimed at reducing the

"Dual benefit finance": contributing to both climate change

emissions, including gases regulated by

vulnerability of human or natural

mitigation and adaptation

the Montreal Protocol; or maintaining or

systems to the impacts of climate

enhancing GHG sinks and reservoirs"

change and climate-related risks,

"Climate services": Transforming climate-related data and other

by maintaining or

information into customised products such as projections, trends,

"Lead to GHG emissions reduction in line

increasing adaptive capacity and

economic analysis, advice on best practices, development and

with the German Climate Action Plan 2050"

resilience"

evaluation of solutions, and any other climate-related service

Global '20 ; BE'13; EU' 17

DE '16

Global'20 ; TRI '13

Global'20

liable to benefit that may be of use for the society -

“Leads to GHG emissions reduction in line

BE‘13

with the National Low Carbon Strategy

Dimensions covered in Sustainable Finance TEG's criteria from

(SNBC) and the Multiannual Energy Plan

the EU Taxonomy

(PPE)”

FR '20

FR'20

Dimensions covered by the “Climate Bond Initiative” FR'20

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Sustainability objectives • Tracked investments contribute to a wide range of climate, energy and sustainability “objectives” • Mitigation, adaptation, biodiversity, etc.

• Different definitions of objectives result in assigning measures to different “sustainability categories” (e.g. Climate Action Plan 2050 (DE), SNBC and PPE (FR), etc.)

• Key challenges: • Investments contributing to climate adaptation and other dimensions are often not included at all due to lack of (quality) data • No clear and common definition of which measures belong to which objectives

• No common methodology to avoid double-counting (or foster dual benefit analysis)

1A – Tracking capital flows

SNBC: National Low Carbon Strategy PPE: Multiannual Energy Plan 31.03.2022

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Climate mitigation: Climate-specific vs. climate-related Measures relate to climate actions to a different degree, from a very narrow and specific climate focus to a weak but still trackable link Definitions developed by Juergens at al. 2012: •

Climate-specific investment: capital flows that target investment resulting in climate change mitigation or avoidance of emissions

•

Climate-related investment: financial flows into measures that, while not primarily intended to mitigate climate change, deliver climate co-benefits in terms of reduction or avoidance of emissions.

Key challenges:

Definitions on what is climate-aligned, climate-related, etc. is blurry – risk of double-counting: •

Example for double counting: exchange high-polluting boilers (primary goal to reduce local pollution); but the investment led fully and directly to the reduction of GHG emissions (Valentová et al., 2019)

Tracking of climate-related investment often needs specific “scoring strategy” •

Example: for Map DE ’19 uses OECD Rio Markers to assess level of energy efficiency gains in buildings

•

Discussion on applicability and usefulness of EU Taxonomy (see next slide)

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Rio markers vs EU Taxonomy

Sweatman and Hessenius (2019), Applying the EU Taxonomy”: Lessons from the Front Line

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Sectors & technologies • Bottom-up approach: • Tracking investment at a technology-level and aggregating it at sector and then national level • Basis for definitions • Sectors and sector boundaries mostly based on national / EU classification systems (example: German Federal Statistical Office sector classification) • Differentiation between sectors • is useful in order to understand where funds have been prioritized in the past, how flows compare over time and where funds are missing • Key sectors: • Energy production, industry, buildings, transport, agriculture

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Sectors & technologies GHG emission trends per sector

Source: IKEM, 2019 1A – Tracking capital flows

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Sectors & technologies – selected examples (mitigation objective) Sectors

Renewable energy •

Energy •

Renewable electricity generation (wind, geothermal, solar, biomass, ocean, hydro or plant retrofits

Energy efficiency

Facilitating grid measures

•

investments in onsite renewables

Industry

1A – Tracking capital flows

Examples

•

Power plant efficiency

•

Transmission and distribution systems

•

Energy infrastructure investment data by reports from the Federal Network Agency (BNetzA) (DE‘16)

•

Cogeneration

•

Lower-carbon power generation

•

Statistics of the Renewed Energy Agency (DE‘16)

Renewable heat production or other renewable energy application

•

Other measures

•

Industrial energy efficiency

•

Cogeneration plants

•

Facility replacement

•

Reduction of fugitive emissions

•

Carbon capture and storage

•

Improved heating and cooling

•

Reduction in GHG emissions from industrial processes

•

Industrial process improvements and cleaner production

•

•

Example of structure: investment volumes broken down into sub-sectors based on the ownership structure of REN installations provided in the public domain

•

Federal Statistical Office: data estimates of investment by energy supply companies

Statistics from Federal Statistical Office (e.g. data on investment by companies in energy efficiency, etc.) (DE‘16)

For a quick overview of which study covers which sectors, see here 31.03.2022

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Sectors & technologies – selected examples (mitigation objective) Sectors

Buildings

Energy efficiency

Other

Examples

Efficiency improvement in lighting, appliances and equipment

•

Annual reports and program evaluation studies (e.g. KfW, DE’10)

Cogeneration plants

•

Flow of investment support by public financial institutions reported in annual reports (DE‘16)

•

Federal Government - Inventory of the federal fiscal expenses and information of the declarations (BE‘13)

Use of lower-carbon fuels

•

Purchases of electric cars by different actors (e.g.

BAFA report) (DE’16)

Transport demand measures

•

Data of disbursement for transport infrastructure from EU funds (e.g. CEF)

Retrofit of existing buildings Energy efficiency improvements in the utility sector and public services

Vehicle energy efficiency fleet retrofit Use of lower-carbon fuels Transport

Electric vehicles Investment in transport infrastructure

Modal shift For an overview of Institutions tracking climate investments in Germany, see here

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Sectors & technologies – breakdown of investment volume per sector Breakdown of 2016 total investment volume by sector and technology in Germany (in billion euros)

Source: IKEM, 2019

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Sectors & technologies Key Challenges:

Lack of high-quality data • Large disparities across (sub-)national levels and time (highly dependent on key player in sector) • Difficult or impossible to separate between sectors (as well as climate-specific and climaterelated investments) from total investment in broad and multi-purpose programs and budget lines • Agriculture and forestry: the least/no data on capital flows is available • Data scarcity high in sectors where projects are mainly small and private sector dominates

Lack of harmonized definitions of sectors and sub-sectors • Complex comparison and aggregation of different study results 1A – Tracking capital flows

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Sources of financing & instruments Private

Public sector sources - selected examples

Specific example: Specific example:

Typical data source:

Direct government spending

Public finances to private and public actors as a financial incentive

EU level funds

Private households

Corporates

Infrastructure programme:

Public subsidy schemes:

RRF, CEF, ERBD, etc.

Family-level economic entities /households

Companies' own resources (private equity)

• Investment in energy efficiency and renewable energy generation deployed in municipal buildings • Public infrastructure

• Grants to purchase electric cars • Subsidies for building renovations

EU funds to support transport infrastructure

Investment in building renovations in singlefamily house

Energy efficiency investments in industry

• Annual reports on investment in energysector infrastructure for energy-sector infrastructure

• Annual reports for support schemes such as grants for uptake of renewables • Annual reports by public financial institutions (EIB) on its disbursements for energy efficiency and other technologies (KfW, Rentenbank)

Reports on disbursements from the (e.g. CEF, RRF, etc.)

• Surveys, expert estimations, commercial reports etc.

• Bloomberg New Energy Finance’s RES investment tracking and reporting • Surveys of private investors • Surveys of commercial banks • Expert estimations

Global'20 ; BE'13; EU'17 ; DE'16; FR' 20

Global'20; BE'13; EU'17; DE'16, FR'20

BE'13; EU'17; DE'16

Global'20; BE'13; EU'17; DE'16

Global'20; BE'13; EU'17; DE'16

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Tracking sources of financing Key problems: • Data of high quality only scattered or not available at all • Finance analysis therefore relying on assumptions (often supported by expert interviews) • Public data: • Comparatively good (and improving) overview of the investment channeled through public institutions, but few examples for comprehensive and comparable tracking • Few countries comprehensive legal tracking requirement (e.g. France) • Private: Data on private investment flows very complex / hardly available • key problems: privacy, lack of coherent and mandatory labeling) Additional challenge: harmonization of tracking and labelling between public and private sector

1A – Tracking capital flows

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Financial instruments facilitating climate investment flows Tracked financial instruments – selected examples Grants

•

Concessional loans

Project-level market-rate debt

Balance-sheet financing (debt)

Balance-sheet Project-level financing (equity) equity

Covered studies consider only primary investment flows: •

accounting for risk-management instruments (guarantees, the cost of capital or debt repayments, repayment grants, feed-in tariffs, or national green bonds) is complex and can lead to overestimations and double-counting

•

Tracking which financial instruments are used by whom for climate-specific activities is especially challenging due to lack of data

•

Analysis relying on assumptions (supported by expert interviews) •

Example: Assumption on average “household” project finance for small scale PV has an average debt/equity split of 80/20 (analysis of proxy rates and expert interviews)

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Overall view of financial value chain Landscape of climate finance; Germany, 2016

Source: IKEM (2019) 1A – Tracking capital flows

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Knowledge and data gaps:

Source: EEA & Trinomics (2017) 1A – Tracking capital flows

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Recap: challenges - data availability & quality Main recommendation across studies: Access to relevant data & harmonization of definitions and assumptions 1. Public entities: introduction of systematic tracking procedures (e.g. via climate tagging in public budgets and/or the establishment of annual evaluation procedure) •

For domestic public climate finance that covers federal, regional, and local levels

•

For climate programs implemented by public banks and agencies

2. Private entities: Introduction of systematic tracking of private sources •

E.g. via surveys and (mandatory) disclosures

Challenges regarding the interpretation and thus the usability of the different studies 1. Results highly depended on/differ in scope and methodological assumptions 2. Comparing different study results complex (especially for non-experts)

•

Aggregation of study results complex/ impossible

3. Wide range of reported investment gaps, instruments, and public/private split 4. Lack of data compromises usefulness of climate investment maps to calculate investment gap

3. Harmonization of tracking approaches in public and private setting 1A – Tracking capital flows

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Example: Tracking investment flows in Czechia

Mapping climate finance flows in energy and building sector (2017) Figure directly incorporated in 2019 CZ NECP

1A – Tracking capital flows

Source: Valentová, Knápek, & Novikova (2019) 31.03.2022

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Tracking of climate and energy investments in CZ 2017 investment map Spending categories: only tangible investments covered • Direct investment in low-carbon public assets • Public finances to stimulate further investment Key data sources for 2017 investment map • Data from public support programmes and related (annual) disclosed statistics • Data on primary investment flows Lack of data for 2017 investment map

• Volume & role of risk-management instruments • Climate tagging & categorisation of investment by private companies & FIs • Data on intangible investments

1A – Tracking capital flows

Source: Valentová, Knápek, & Novikova (2019)

Estimated investment gap, i.e., the difference between the observed investment flows and estimated yearly investment needs to reach the 2030 targets

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Tracking of climate and energy investments in CZ 2017 investment map Key challenges for CZ country study: • Accounting for extent to which climate-related (rather than climate-aligned) measures have mitigation as a co-benefit

• Flow through commercial financial institutions (commercial banks, pension funds, and investment funds) – data on private intermediaries • Approaches to calculate incremental costs of climate investment to be developed further to

prevent an over- or under-estimation of related investment • Methodology to deal with time lags for allocating investment to a specific year, given that the investment process may take long time 1A – Tracking capital flows

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Tracking public and private climate investment Source: Valentová, Knápek, & Novikova (2019)

Estimates of investment into the buildings sector not included in the map in 2019 (in CZK billion)

From traceable investments, roughly equal public/private split goes into the decarbonisation of buildings

1A – Tracking capital flows

BUT

A large share of private investment is not accounted for, since most investments that pass through public intermediaries or originate from public sources are tracked/included in the investment map.

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1B. Investment Needs and Gaps Analysis

Three steps to develop strategies to close investment gaps

1 CLIMATE FINANCE LANDSCAPES -

Tracking and mapping life-cycle of capital flows based on (historical) data

1B – Investment needs and gaps analysis

2 INVESTMENT NEEDS ANALYSIS

Modeling and assessing investment needs (order of magnitude)

3 INVESTMENT GAP ANALYSIS

Assessing the difference between current/planned and required investment levels

REFORM & Closing the investment gap

CAPITAL RAISING STRATEGIES

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Basic Building Blocks to Assess Investment Needs Macroeconomic Factors

Energy Demand

+ Energy Supply Climate and Energy Investments Map

= Technologies

Capital Raising Strategy

Investment Needs

Investment Gaps

Time horizon 1B – Investment needs and gaps analysis

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Discussing investment needs assessments

Key question: How much (order of magnitude) is needed in which sectors to reach a certain target in a certain timeframe?

1B – Investment needs and gaps analysis

1

Modelling type (bottom-up vs top down) and underlying assumptions

2

Scenarios

3

Objectives

4

Types of costs

5

Roles of various investors

6

Temporal dimension

7

…and many other factors 31.03.2022

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Key messages for the assessment of climate and energy investment needs

1

Pay attention to assumptions! Estimates of investment needs depend on assumptions that are taken at different places in the analytical/modeling framework.

2

Understand the scenarios used and in particular what is and what is not included in the baseline! Make conscious choices about the scenarios you want modeled – and when looking at investment needs, make sure you understand the policy scenario and in particular what is included in the baseline!

3

Climate and energy investments are no ends in themselves but are an important means for reaching specific energy and climate policy objectives.

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Investment needs for building sector: Selected studies in the building sector, Germany

Juergens, Piantieri et al. (2019) 1B – Investment needs and gaps analysis

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Three steps to develop strategies to close investment gaps

1 CLIMATE FINANCE LANDSCAPES -

Tracking and mapping life-cycle of capital flows based on (historical) data

1B – Investment needs and gaps analysis

2 INVESTMENT NEEDS ANALYSIS

Modeling and assessing investment needs (order of magnitude)

3 INVESTMENT GAP ANALYSIS

Assessing the difference between current/planned and required investment levels

REFORM & Closing the investment gap

CAPITAL RAISING STRAT

EGIES

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Assessing the sustainable investment gap Approaches to assess investment gap: 2030 Yearly investment gap to reach 2030 targets – Czechia, EUR million

Valentová, M., Dunovski, D., Knápek, J. (2021).

…or combination of the two 1B – Investment needs and gaps analysis

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Investment needs and gaps in NECPs Regulation on the governance of the energy union and climate action ((EU)2018/1999) Investment needs – (Article 7) “(…)provide a general overview of the investment needed (…) and assessment on the sources of that investment."

•

i. existing investment flows and forward investment assumptions with regard to the planned policies and measures

•

ii. sector or market risk factors or barriers in the national or regional context

•

iii. analysis of additional public finance support or resources to fill identified gaps (…)

Progress Reports (Article 17) – due 2023

•

“information on the progress accomplished towards (… ) financing and implementing the policies and measures necessary to meet them, including a review of actual investment against initial investment assumptions”

1B – Investment needs and gaps analysis

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State of play of investment needs and gaps assessment in NECPS

National Energy and Climate Plans •

“Incomplete, inconsistent and show large disparities” - European Court of Auditors, 2021 •

Framework: No common framework for MS to apply when assessing investment flows, needs and gaps, use of different definitions, display of data, etc.

•

Methods: Different methods to assess investment needs and gaps (bottom-up models, least-cost investment analyses, etc.)

•

Scope: baselines and targets, methods to calculate and/or highlight total versus incremental costs, different sectors, sub-sectors, actors, sources, etc.

•

Display: Incomprehensible display (unclear what exactly is described or included), data sources, time frames and methods unclear and inconsistent

- European Court of Auditors, 2021

1B – Investment needs and gaps analysis

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Investment needs and gaps in NECPs - examples Elements under Article 7

Austria

i) Existing investment flows:

Scattered data across NECP, no comprehensive assessment available

ii) Sector or market risk factors or barriers

Mostly lacking, only some descriptive statements

iii) analysis of additional public finance support or resources to fill identified gaps

•

Comprehensive assessment of investment needs and gaps lacking

•

Estimated total investment volume for separate measures of each dimension of the Energy Union for the period to 2030 (for style see table)

•

Differentiating between role for national / EU / private investment and investment need for different subsectors, but no details about estimated allocation

•

Lack of general assessment of funding sources, finance investment gap and role of different investors and instruments

•

No details on methodology, time dimension of investments, etc.

1B – Investment needs and gaps analysis

Example (structure)

Structure of Investment needs and sources display in Austrian NECP. Source: Austrian NECP, 2019

Source: own assessment and assessment in the COM: “Assessment of the final national energy and climate plan of Austria” (2020) 46

Investment needs and gaps in NECPs - examples Required elements

Example: Czechia

1 Existing investment flows:

Only includes “Climate Investment flows” of 2017, produced in independent study by Valentová et al.

(Technical University Prague) financed by EUKI (only covering buildings and renewables) – see slide 32

2 Sector or market risk factors or barriers

No comprehensive assessment market risks and barriers

3 analysis of additional public finance support or resources to fill identified gaps

•

No information about total amount of investment needs to implement the NECP between 2021 and 2030; but includes information one some of the sectors covered in NECP

•

Method to assess investment needs appears to be bottom-up, but no methodology specified

•

No comprehensive assessment of impact assessment of planned policies and measures with respect to investment needs

•

Sources of public funding are provided (mostly descriptive), but missing analysis on how to involve private sector in financing the investment needs

Example see details in next section of this presentation

Source: own assessment and assessment in the COM: “Assessment of the final national energy and climate plan of Czechia” (2020).

1B – Investment needs and gaps analysis

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2. Illustrating data requirements versus data availability to assess investment needs and gaps to deliver the EU Green Deal

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Assessing investment needs in the building sector

Current investment needs estimates in CZ building sector overview Investment Needs – Building sector Long-Term Renovation Strategy (MoIT, 2020) • €13.7 bn by 2030 in optimal scenario leading to 8% reduction in energy consumption by buildings • €23.3 bn by 2030 in hypothetical scenario leading to 17.4% reduction in energy consumption by buildings Chance for Buildings (2020) • €27.9 bn by 2030 in progressive scenario leading to 25% - 38%* CO2 emission reduction • €39.9 bn by 2030 in hypothetical scenario leading to 32% - 45%* CO2 emission reduction → Current gap to target: investment in renovation of buildings needs to roughly double to align with the progressive scenario, or triple to align with the hypothetical scenario, which is on track to 55% emission reduction target by 2030 and climate neutrality by 2050 2 – Illustrating data requirements vs. data needs in Czechia

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52 52

Key steps for each flagship and set of countryspecific recommendations • What are the biggest challenges in the sector?

• Where are the biggest barriers for investment?

• Where are the biggest investment gaps?

• What is proposed in key policy documents (national strategies, NECP, RRP, etc.)?

Analysis of barriers and opportunities on sectoral level

2 – Illustrating data requirements vs. data needs in Czechia

INGA and setting a flagship target • Development of realistic yet ambitious target that has significant GHG emission reduction potential as well as a transformative character • Calculation of investment needs and gap to realize flagship • Calculation of GHG emission reduction potential

• Proposal of policy reforms • Identification of suitable financing instruments • Highlight role of public financing (e.g., EU budget)

Implementation of the flagship

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Investment gap to reach flagship target

2 – Illustrating data requirements vs. data needs in Czechia

Estimated total investment need

Estimated total investment need

Billion Euros

• Flagship goal: doubling or tripling the rate of single-family home deep renovations until 2030 • Assessment from our “6 flagships to accelerate Czechia’s green transition (2021)” study Assessment based on: • Assessment of existing national and European plans • Data in available literature (e.g., on average rates of public financing needed, etc.)

• Expert interviews

Public investment gap Estimated public investment need

Potential level of public investment

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Breakdown: estimated investment need to reach flagship target →Investment needs – tangible assets •

Investment needed for renovations of single-family houses estimated at €12 bn1 between 2021-30

•

Public funds required to induce the investment estimated at 25 – 30%, €3 - 5 bn in 2021 – 2030

•

Possible sources: €760 mln from RRP, €1.6 bn from EU ETS national revenues

•

Current financing gap of public funding: approx. €1 - 3 bn

•

Private funds required: €8+ bn in 2021 – 2030 •

Combination of own funds of the single-family house owners and commercial loans

→Project development assistance financing - intangible assets • First step assistance –100% financed from public funds • Second step assistance –75% financed from public funds, 25% financed by clients • Administrative costs of the technical assistance programme 2 – Illustrating data requirements vs. data needs in Czechia

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Investment gap and needs analysis for Energy Efficiency (Buildings) Broader set of factors that affect the demand for energy services in building

2 – Illustrating data requirements vs. data needs in Czechia

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Lack of data in the building sector Building sector – Examples of required data Required data

Available for CZ (example)

Technical state & energy efficiency of housing stock differentiated by housing type

Last available from 2020

Energy consumption & energy savings potential

Especially by non-residental buildings

(Historic) data on renovation rate and type

Information on the quality, depth, & amount of home/DIY renovations Example: in CZ, DIY renovations are prevalent hugely influencing renovation quality

Data on preferred support instrument by actor type

Data available from survey by Chance for Buildings (2021)

Investment towards building adaptation and climate resilience of buildings

Data available only covers capital flows that result in climate change mitigation or avoidance of emissions in the building sector

Market data on sales of energy efficient appliances & equipment

Only the cost of main (big) appliances included in CZ climate & energy investment map (2017), doesn‘t cover whole investment

2 – Illustrating data requirements vs. data needs in Czechia

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Selected examples: Assessment investment gap in single-family houses Type of data needed to calculate investment gap

Examples of available data in CZ case

Amount of subsidies/co-financing dedicated to building renovation

Data from New Green Savings Programme (co-financing percentage from loans vs. equity estimated by experts) EU ETS revenues used to finance thermal efficiency retrofits of residential buildings (2017) Recovery and Resilience Facility

(Estimates for) rates for public guarantee on dedicated loans for co-financing by actor

Qualitative assessments, historical data available (New Green Savings Programme, etc.)

Amount and type of investment realized by private actors without the support of public financial intermediaries2

n/a, but estimated using the data on renovation rates (not included in the 2017 map because it does not represent actual disbursement)

Costs of intangible assets (e.g. workforce trainings for consultation experts, builders, renovators; R&D; information campaigns; policy development)

Scattered data available, assumptions based on e.g. cost estimates and historical data of technical assistance & information campaigns (data derived from expert interviews and literature review)

2 – Illustrating data requirements vs. data needs in Czechia

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Selected examples: Assessment investment gap in single-family houses Type of data needed to calculate investment gap

Examples of available data in CZ case

Data and projections on share of investment in specific building types coming from public sources

Historic data available: approx. 40% of total investment in the building sector in 2017 came from public sources: EU funds and the country's public budget.1

Specific estimates of impacts of the individual (co-)funding measures or groups of measures, & implementation & promotion of the measures

Only estimates available on how impactful (co-)financing of certain renovation incentives

Investment flowing through private intermediaries (government actors, DFIs, commercial banks)

n/a financing from the EIB cannot be included because EIB doesn't report the actual disbursements for climate action

Public procurement & administrative costs of governmental building investments1

Excluded from governmental budget amounts that are climate-tracked

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Learnings from bottom-up approach • In Czechia, tracking incremental or additional investments is not always possible because the BAU case is not known, though this would be more useful for policy-makers.1 • I.e. The incremental cost of electric efficiency in the buildings sector can be measured, but only the total capital investment of renewable energy can be measured.

• No quantification of the role of government guarantees or grant-equivalent value of concessional loans – would result in double counting • Investment channelled exclusively by private financial intermediaries or realized by private actors w/o the support of public finance is not available • Insufficient climate tracking & lack of data prevents tracking of climate investments made w/o public incentives

2 – Illustrating data requirements vs. data needs in Czechia

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3. Mapping links between methodologies to assess investment needs to deliver the Green Deal and the EU fiscal framework

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Ongoing discussions on how to reform the fiscal framework

1 Expenditure rule instead of structural deficit rule

2 Country-specific debt-reduction pathways

3 Green Golden Rule / Exemption of green investments from expenditure ceiling

4 Centralised EU fiscal capacity to fund green investment

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Expenditure rule instead of structural deficit rule • Enhanced version of the current expenditure benchmark

• Rule aiming to reach country-specific fiscal targets by putting a cap on growth rate of nominal public expenditure • Calculated net of interest expenditures, cyclical expenditures and net public investments • Complementary to "Green Golden Rule": better used in association

• Our understanding: no concrete inclusion of investment needs and gaps assessment

Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021); Finance Watch (2021); Claeys, G., Darvas, Z., Leandro, A. (2016); Centre for Economic Policy Research (2018)

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Country-specific debt-reduction pathways • Country-specific debt sustainability analyses as the basis of country-specific debt pathways • Feed into governments' fiscal plans.

• Debt sustainability analyses to be enhanced: • Include the emergence of climate-related fiscal risk and resilience-related fiscal risks • Our understanding: no concrete inclusion of investment needs and gaps assessment in the country-specific debt sustainability analyses

Finance Watch (2021); Darvas, Z., Martin, P., Ragot, X. (2018)

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Green Golden Rule / exemption of green investments from expenditure ceiling The Green Golden Rule is an idea highlighted by many think-tanks and researchers.6 However, their exact propositions sometimes slightly differ, e.g. regarding the type of expenditures to be considered for exemption.

•

Some see pure gross fixed capital formation (GFCF) as the only necessary investments to be exempted from EU fiscal rules.7

•

Others recognize the need for many more expenditures which are not GFCF but also include support expenditures for the green and just transition.8

Usage of investment needs and gaps assessment: •

The maximum amount of investment exempted per country could be based on the order of magnitude of their sustainable investment gap.

•

More particularly, the exact type of investment eligible for an exemption of the fiscal rules could be the ones defined in a clear and transparent investment needs and gaps assessment methodology.

6 Claeys, G. (2019); Wolff, G. (2021); Darvas, Z., Wolff, G. (2021); Bodin, O. (2020) 7 Claeys, G. (2019); Wolff, G. (2021) 8 Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021); Finance Watch (2021); Giavazzi, F., Guerrieri, V., Lorenzoni, G., Weymuller, C-H. (2021) 3 – Investment needs and gaps assessment and the EU fiscal framework

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Centralised EU fiscal capacity to fund green investment This proposal is based on the idea that certain public investments from Member States are funded by the EU budget and common debt.

• The European Fiscal Board10, the European Central Bank11, and the International Monetary Fund12 have been arguing for such an approach.

• The different proposals made by experts indicate that such an instrument could work similarly to the RRF: • Member States could submit “National Reform and Investment Plans” (NRIPs)13 • Integrate Member states’ economic reform and fiscal plans (from National Reform Programmes and Stability of Convergence Programmes) • These plans would serve as the basis for the allocation of EU funds.

Usage of investment needs and gaps assessment: • NRIPs could be built based on sustainable investment needs and gaps assessments 10 European Fiscal Board (2021) 11 European Central Bank (2020) 12 International Monetary Fund (2018) 13 Finance Watch (2021); Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021) 3 – Investment needs and gaps assessment and the EU fiscal framework

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Insights and conclusions for discussion • Track climate-related capital flows,

finance landscape, investment needs and

gaps analysis is available • Necessary to do the analysis at sectoral level, i.e. you need sector expertise and knowledge about the technological developments in the sector • Data requirements and availability is the biggest challenge, but progress.

And: public sector data appears to be better than private. BUT: be aware of different use of definition and concepts.

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References (1/4) Bodin, O. (2020) Green Deal - European Semester: Green Golden Rule as a necessary link. Greentervention. https://greentervention.files.wordpress.com/2020/02/greentervention-green-golden-rule-1.pdf

Buchner, Barbara, Angela Falconer, Hervé Hervé-Mignucci, Chiara Trabacchi, and Marcel Brinkman. 2011. ‘The Landscape of Climate Finance’. Climate Policy Initiative (CPI). https://climatepolicyinitiative.org/publication/the-landscape-of-climate-finance/.

Buchner, Barbara, Padraig Oliver, Xueying Wang, Cameron Carswell, Chavi Meattle, and Federico Mazza. 2017. ‘Global Landscape of Climate Finance’. Climate Policy Initiative (CPI).

Buchner, B., Naran, B., Fernandes, P., Padmanabhi, R., Rosane, P., Solomon, M., Stout, S., Strinati, C., Tolentino, R., Wakaba, G., Zhu, Y., Meattle, C., & Guzmán, S. (2021). Global Landscape of Climate Finance 2021.

Centre for Economic Policy Research (2018). https://cepr.org/sites/default/files/policy_insights/PolicyInsight91.pdf.

Claeys, G, Bruegel. (2019). The European Green Deal needs a reformed fiscal framework Retrieved February 16, 2022, from https://www.bruegel.org/2019/12/theeuropean-green-deal-needs-a-reformed-fiscal-framework/ CPI (2012), The Landscape of Climate Finance in Germany. Retrieved from : https://www.climatepolicyinitiative.org/wp-content/uploads/2012/11/Landscape-ofClimate-Finance-in-Germany-Full-Report.pdf.

CPI (2021), Global Landscape of Climate Finance 2021. Retrieved from : https://www.climatepolicyinitiative.org/wp-content/uploads/2021/10/Full-report-GlobalLandscape-of-Climate-Finance-2021.pdf Darvas, Z., Martin, P., Ragot, X. (2018). European fiscal rules require a major overhaul.

Darvas, Z., Wolff, G. (2021) A green fiscal pact: climate investment in times of budget consolidation | Bruegel. Retrieved February 16, 2022, from https://www.bruegel.org/2021/09/a-green-fiscal-pact-climate-investment-in-times-of-budget-consolidation/ EEA & Trinomics (2017), Assessing the state-of-play of climate finance tracking in Europe. Retrieved from: https://trinomics.eu/wpcontent/uploads/2017/07/State-of-play-of-European-climate-finance-tracking-published-6-July-2017.pdf Eichler, L., Rademaekers, K., van den Berg, C., van der Laan, J., & Bolscher, H. (2017). Assessing the state-of-play of climate finance tracking in Europe Final Report.

EUR-Lex (2018) Regulation on the governance of the energy union and climate action. 32018R1999 . Retrieved February 16, 2022, from https://eurClimate & Company | lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.328.01.0001.01.ENG&toc=OJ:L:2018:328:FULL 31.03.2022

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References (2/4) European Central Bank (2020), The fiscal implication of the EU’s recovery package.

European Commission, COMMISSION STAFF WORKING DOCUMENT (2020) Assessment of the final national energy and climate plan of Austria.

European Commission, COMMISSION STAFF WORKING DOCUMENT (2021). Preliminary analysis of the long-term renovation strategies of 13 Member States. SWD(2021) 69 final.

European Commission, Committee and the committee of the regions (2020). An EU-wide assessment of National Energy and Climate Plans Driving forward the green transition and promoting economic recovery through integrated energy and climate planning.

European Commission (2011). EUROPEAN UNION ACCOUNTING RULE 6 - INTANGIBLE ASSETS. Retrieved from: https://ec.europa.eu/info/sites/default/files/about_the_european_commission/eu_budget/eu-accounting-rule-6-intangible-assets_2011_en.pdf

European Court of Auditors (2021) Special Report Sustainable finance: More consistent EU action needed to redirect finance towards sustainable investment.

European Fiscal Board (2021), Annual Report 2021.

Eurostat, European Commission, REGULATION (EU) No 549/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 21 May 2013 on the European system of national and regional accounts in the European Union (ESA 2010). Retrieved from: https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32013R0549&from=EN Federal Ministry Republic of Austria Sustainability and Tourism (2019) Integrated National Energy and Climate Plan for Austria 2021-2030.

Giavazzi, F., Guerrieri, V., Lorenzoni, G., Weymuller, C-H. (2021), Revising the European Fiscal Framework.

Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021). Financing for a future-fit Europe. Feasible and impactful proposals for a reform of the EU fiscal framework, ZOE Institute for Future-fit Economies.

Hainaut, H., Gouiffes, L., Cochran, I., & Ledez, M. (2018). Landscape of climate finance in France. Edition 2018.

I4CE (2021), Panorama des financements climat, 2021 Edition, retrieved from: https://www.i4ce.org/download/edition-2021-panorama-des-financements-climat/# IKEM (2019), Climate and energy investment map in Germany – Status report 2016. Retrieved from : https://www.ikem.de/wpcontent/uploads/2019/05/IKEM_ANovikova-et-al_2019_Climate_Energy_Investment_Map_Germany2016_Full-report.pdf

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References (3/4) International Monetary Fund (2018), A central fiscal stabilization capacity for the Euro area.

Juergens, Ingmar, Hermann Amecke, Rodney Boyd, Barbara Buchner, Aleksandra Novikova, Anja Rosenberg, Kateryna Stelmakh, and Alexander Vasa. (2012) ‘The Landscape of Climate Finance in Germany’. Climate Policy Initiative (CPI).

Juergens, Piantieri et al. (2019) "How to Assess Investment Needs and Gaps in Relation to National Climate and Energy Policy Targets? A manual and a case study for Germany" European Climate Initiative EUKI Kisielewicz, J. et al. (2020). Supporting low-carbon transition of the Czech Republic by EU ETS Funding Mechanisms-Deliverable 1 Cross-sectoral gap assessment for the Modernisation Fund. (2020). ICF

Kamenders, A., Rochas, C., & Novikova, A. (2018). Investīcijas energoefektivitātes un ilgtspējīgas enerģētikas projektos Latvijā. www.euki.de Ledez, M., Hainaut, H. (2021) Landscape of Climate Finance in France - 2021 edition - I4CE. Retrieved February 16, 2022, from https://www.i4ce.org/download/landscape-climate-finance-france-2021-edition/ Rademaekers et al. (2016) Landscape of climate finance in Belgium Final Report. Trinomics. Retrieved from : https://klimaat.be/doc/landscape-of-climatefinance-in-belgium.pdf Ministry of Industry and Trade, Long-term renovation strategy to support the renovation of the national stock of both public and private residential and nonresidential buildings (2020) https://ec.europa.eu/energy/sites/default/files/documents/cz_2020_ltrs_official_translation_en.pdf

Novikova, Aleksandra, Kateryna Stelmakh, Irina Stamo, and Alexander Klinge. 2019. ‘Climate and Energy Investment Map in Germany. Status Report 2016’.

Institut für Klimaschutz, Energie und Mobilität (IKEM). Šance pro (2020) Chance for Buildings, Long Term Renovation Strategy for Czech Republic, Update May 2020, https://sanceprobudovy.cz/wpcontent/uploads/2020/06/strategie-renovace-a-adaptace-budov-kveten-2021.pdf United Nations (2016). Corporate Guidance for International Public Sector Accounting Standards Intangible Assets. https://www.un.org/ipsas/Corporate%20Guidance/Corporate_Guidance_Intangible_Assets.pdf Valentová, M., Knápek, J., & Novikova, A. (2019). Climate and energy investment map – Czechia: Status report 2017: Buildings and renewable energy supply and infrastructure. Prague: Czech Technical University in Prague.

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References (4/4) Valentová, M., Dunovski, D., Knápek, J., 2021. Capital Raising Strategy for Czechia: buildings and renewable energy supply. Prague: Czech Technical University in Prague.

Wolff, G., (2021) Can the EU fiscal rules jump on the green bandwagon? | View | Euronews. (n.d.). Retrieved February 16, 2022, from https://www.euronews.com/2021/10/22/can-the-eu-fiscal-rules-jump-on-the-green-bandwagon-view

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Shifting the trillions Crucial governance frameworks in place on EU level…

2018

Governance Regulation of the Energy Union

2018

Sustainable Finance Action Plan

2019

EU Green Deal

2021

Recovery and Resilience Facility

2021

European Climate Law

2021

Fit-for-55 Package

2021

Renewed Sustainable Finance Strategy

2011

European Semester

… and at national level

Green budgeting frameworks

National Climate Laws

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Understanding public and private investments •

Need to understand current levels of public and private investments per (sub-)sector, based on reliable data, computed from reliable and transparent methodologies ▪ Data sets and economy-wide investment statistics differentiated by the relevant categories, such as public and private; green, transition, or significant harm type activities ▪ Develop a better understanding of the current and future investment needs and challenges to ultimately embed plans into comprehensive national and EU strategies

•

Improve the “sustainable finance toolbox” of the EU and Member States to close investment gap

•

Develop comprehensive, long-term strategies that guide private investments

Inaction poses the following risks:

Failure to meet targets and deliver promise of Green Deal Exposure physical and transition risks Risk of macroeconomic imbalances from higher additional financial burden year after year 31.03.2022

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