German climate finance 2022: Pledge fulfilled early – but will it last?

These days the German government submitted its 2022 climate financing figures to Brussels, as required under an EU regulation. According to the figures, Germany has fulfilled its €6 billion pledge three years earlier than promised. Worth a quick analysis.

A few weeks ago, the German Federal Ministry for Economic Cooperation and Development (BMZ) announced that Germany had already in 2022 achieved its pledge to increase climate finance to at least six billion euros per year by 2025 at the latest, three years earlier than planned. Now the formal report to Brussels followed: According to this report, budgetary allocations for supporting low-income countries’ efforts to limit or reduce emissions and adaptating to climate change amounted to 6.4 billion euros (counting budgetary allocations and grant equivalents of low-interest loans).

The diagram shows the composition of public climate finance in 2022, broken down by the various areas of use. The green fields show public funds from the federal budget. The orange field shows funds mobilised on the capital market, especially for loans from KfW and DEG.

A further €3.1 billion was mobilised by KfW on the capital market, primarily for public loans. Overall German public climate finance thus reached around €9.5 billion in 2022. When adding private finance that the German government claims to have mobilised, the total level of Germany’s total contribution for 2022 to the develoepd countries’ still unfulfilled $100 billion commitment amounts to almost €10 billion.

Forecasts for 2022 exceeded

The level reached was apparently also somewhat surprising for the German government in that the original forecast on budget allocations for climate finance for 2022 had been around €4.3 billion, a level that has now been exceeded by two billion euros. There is no detailed analysis of what might have caused this overachivement – the government points to an unexpectedly significant increase in demand for climate projects from recipient countries and some larger individual programmes that were not foreseeable in advance, such as the funds for the Just Energy Transition Partnership with South Africa. In addition, there were unplanned special funds for food security in low-income countries in response to reduced grain exports from Ukraine as a direct result of the war. These special funds also financed additional adaptation programmes in agriculture.

In itself, it is welcome that German climate finance has increased significantly. However, it is also no secret that ex-post reporting systems are quite lax – often the climate relevance of funded projects and programmes is assessed very generously, especially as developed countries are under pressure to fulfil their climate finance pledges. It is also possible that growth in climate aid has taken place at least partly at the expense of other development priorities. At times, different goals can often be coupled with each other – for example, if the expansion of energy supply is based on renewable energy from the outset. However, this is not always successful: If, for example, an adaptation project aims to secure current yields in agriculture despite the changing climate, then money invested may merely maintain the status quo despite the climate crisis, without generating an additional development dividend.

The green areas show budget funds, such as for bilateral grants or payments into multilateral funds. The orange bar areas reflect funds mobilised by KfW/DEG on the capital market, from which the majority of loans are provided within the scope of development cooperation. For 2023 and 2024, forecasts are only available for budget funds and grant equivalents of development loans, but not for mobilised funds. By 2025 at the latest, budget resources (plus grant equivalents) for climate finance should be at least six billion euros per year; mobilised funds are not part of the pledge. Yet, a target of at least €8 billion in 2025 would be more appropriate than the current German pledge. Yet, the level currently promised for 2025 has now already been reached in 2022, according to the German government.

More funds for adaptation

In line with the overall growth, more finance was also available for supporting adaptation to climate change. The German government reports a total €2.8 billion or around 44 percent of climate finance for 2022. However, these figures only refer to budget allocations (and the grant equivalent of loans), not to public climate finance as a whole. Furthermore, the government also adds half of what was classified as serving both mitigation and adaptation simultaneously. This is a partly questionable assumption insofar as this category also includes numerous programmes whose climate relevance is often only vaguely recognisable and which, for example, often serve general environmental protection.

Fig. 3 provides clarity here. According to this, the area of adaptation had a share of just over one fifth of total climate finance. The German government remains far from achieving a true balance between adaptation and mitigation.

The BMZ’s statement that it has achieved a balance in the allocation of funds to mitigation and adaptation refers to the budget funds (plus grant equivalents of loans) as shown in the diagram on the left, which account for only a portion of German climate finance. Looking at total climate finance (right-hand side), only 22 percent goes decidedly to adaptation; the extent to which cross-cutting also contributes to adaptation is not measured.

The development of finance for adaptation is also interesting in that, in 2021, developed countries committed to a goal of doubling collective annual climate finance for adaptation by 2025, compared to 2019. In order to contribute to this goal, Germany would now have to at least double its own adaptation funding as well, so that budget allocations for supporting adaptation would reach a level of at least €3.5 billion annually by 2025 (cf. Fig. 4). Over the last few years, finance for adaptation has increased. If the trend since 2019 continues, a doubling would be within reach, but presupposes that climate finance as a whole continues to grow, which is far from certain.

Shown is the development of budget funds (including grant equivalents of development loans) for supporting adaptation to climate change. Following the logic of the German government, it is assumed that 50% of funds with a cross-cutting focus also serve adaptation. For 2025, the level to be reached is shown, if Germany doubles its adaptation funding to contribute to the target set at COP26 of doubling global climate finance for adaptation by 2025 compared to 2019.

High share of loans in climate finance

Not even half of bilateral climate finance reached recipient countries in the form of grants. This is no improvement over 2021 and only a slight improvement over 2020 (43 percent) and 2019 (41 percent). More than half of climate finance is provided by the German government in the form of climate loans and other non-grant instruments (see Fig. 5).

* Including smaller amounts in the form of equity and other instruments. | Only bilateral public funds are shown. Contributions to multilateral climate funds and multilateral development banks are usually made (albeit with exceptions) in the form of grants. However, these institutions (especially the development banks) often also issue loans. To include Germany’s multilateral contributions simply as grants above would therefore distort the picture.

Under the right circumstances, loans in climate finance can be a suitable instrument if the projects financed through such loans are financially viable so that the credits can be repaid from later earnings; however, this is not always the case and generally not in the case of adaptation. Recipient countries, many of which have made little or no contribution to the climate crisis, ultimately pay for the financed programmes and projects themselves when they repay the loans. This blatantly contradicts the principles of climate justice and can further increase the debt burden for countries, especially since their financial leeway can also be severely impaired due to other crises (including the aftermath of the Corona pandemic or worsening impacts of climate change).

Projected decline 2023 and 2024

The German government has now also published updated forecasts for climate finance budget allocations for 2023 and 2024. They point to declining funds, projecting around €5.1 billion for 2023 and around €5.3 billion for 2024 respectively (cf. Fig. 2), compared to the €6.4 billion reached in 2022. Nevertheless, the BMZ is confident that it will be able to maintain the (more than) six billion euros it has reached n 2022 also for the coming years, argueing that their own forecasts are conservative and have often been exceeded in the past. While the latter is true, it does beg the question if hoping for the inadequacy of one’s own forecasting tools is a solid basis for fulfilling international commitments.

Next steps for the German government

While the level of climate finance achieved in 2022 is notable, the federal government should by no means rest on its laurels. Some conclusions can be drawn from the figures now published:

As part of the ongoing parliamentary talks on the 2024 federal budget, the government should noticeably increase the annual levels for climate finance in order to reliably approach at least six billion euros annually also in its own forecasts. This requires to increase the budget of the BMZ over the next couple of years, rather than decrease it, as currently planned by the German government.

Furthermore, the government should increase the pledge itself – to at least eight billion euros annually in budgetary funds for climate finance. This would be a more appropriate target given the increasing burdens of the climate crisis in poorer countries and also in terms of Germany’s economic strength.

The government should increase the share of funds for adaptation to climate change. True balance, as intrenationally agreed as a principle, woudl require a 50/50 split of total climate finance (i.e. not just budgetary allocations) between mitigation and adaptation.

Future increases in climate finance from Germany should focus primarily on providing grants, to avoid exacerbating the debt burden in low-income countries further. This requires correspondingly more budget allocations in the coming years and less reliance on finance mobilised on the capital market to provide loans and other non-grant instruments.

Jan Kowalzig, Oxfam

The data for 2022, on which this article is based, can be found in the government’s regular reporting to Brussels. The data is publicly available here.