1. Greenhouse gas emissions in NRW
Greenhouse gas emissions, consisting of carbon dioxide (CO2), methane (CH4) and other greenhouse gases, are distributed across various sectors. In Germany, 36.3 percent of carbon dioxide equivalents (CO2 eq.) emitted are attributable to energy generation, 21.4 percent to the transportation sector, 18.3 percent to the building sector and 13.9 percent to other industrial combustion (EDGAR, 2023). Even though CO2 emissions have risen by 15 percent globally in relation to gross domestic product (CO2 intensity) since 1990, they have fallen by 56 percent in Germany (EDGAR, 2023). However, further reductions are needed before the climate protection targets can be achieved, which will require immense investment in climate protection in the industry, transport, energy and building sectors.
According to the German Emissions Trading Authority, 29.5 percent of industrial CO2 emissions in Germany are attributable to the iron and steel production sector (DEHSt, 2023). A further 20.9 percent of emissions come from refineries. The production of cement clinker accounts for 16.7 percent and the chemical industry for 12.8 percent. For industrial regions such as North Rhine-Westphalia (NRW), this means that successful decarbonization depends to a large extent on the transformation of these sectors, which will require considerable investment from companies.
CO2 emissions in Germany have fallen noticeably in all sectors in recent decades (UBA, 2024). The sectors have progressed at different speeds. The energy industry has been able to reduce its CO2 emissions from 475 million tons of CO2 equivalents in 1990 to 205 million tons in 2023 (-57%) through the use of efficiency measures and renewable energies. In comparison, industry has reduced its emissions from 278 to 155 million tons (-44%), while the transport sector was only able to reduce its CO2 emissions from 163 to 146 million tons (-11%). In the building sector, CO2 emissions were also reduced comparatively sharply by 51%, from 210 to 102 million tons. In agriculture, CO2 emissions fell from 83 to 66 million tons (28%). At just over 1 million tons and just under 13 million tons respectively, the building and transport sectors exceed the annual emissions permitted in 2023 in accordance with the Federal Climate Protection Act (KSG).
In a comparison of the federal states, NRW is the fourth largest emitter of energy-related CO2 emissions per inhabitant in Germany. While emissions in 2020 were 21.8 tons per year and per inhabitant in Saarland, they were 11.7 tons in NRW. Brandenburg and Bremen are in second and third place with 19.4 and 13.6 tons per inhabitant respectively. In comparison, Baden-Württemberg, Hesse, Thuringia and Berlin have the lowest values (Statistische Ämter des Bundes und der Länder 2024,). The following picture emerges for the shares of the federal states in the total CO2 emissions of the Federal Republic of Germany: 30% of the CO2 emissions in Germany are attributable to NRW, while NRW accounts for 20.6% of the GDP of the Federal Republic (Figure 1). In order to calculate the investment required for decarbonization in NRW, it is important to take into account the differences in the calculations, which are usually based on a global or state level. The weighting via the proportionate CO2 emissions shows that NRW must invest significantly more in climate neutrality compared to its economic output.
2. Investment needs in climate neutrality
In order to become climate-neutral by 2045, all sectors will have to invest on a large scale. In recent years, various studies have estimated how high this requirement is. The calculations of the various studies for the required investment sums use different methodologies and consider transformation paths of different lengths and different sectors. The studies are briefly presented below and the investment volumes that can be derived for NRW for the transformation period 2023 to 2045 are outlined (Table 1):
- The McKinsey study from 2021 estimates an annual investment volume of EUR 200 billion for Germany for replacement investments alone and a volume of EUR 40 billion for additional investments. The additional investments involve expenditure on the purchase of machines, vehicles or systems compared to their CO2-intensive previous versions, as well as additional investments in infrastructure required for these new technologies. Cumulatively for Germany, this investment requirement would correspond to around 5 trillion euros in replacement investments and around one trillion euros in additional investments by 2045. The investments in this study include investments in infrastructure, equipment and buildings (McKinsey & Company, 2021). NRW's share of these investments would be €75 billion per year if the investment volume were calculated based on the shares of the federal states in Germany's total emissions.
- A study by Allianz Trade from 2023 calculates cumulative investments of 2.7 trillion euros at a global level so that the manufacturing industry can avoid over 90 percent of CO2 emissions by 2050. These are primarily investments in energy efficiency through hydrogen, biomass and the generation of heat from electrical energy. However, according to the study, an additional 3.1 trillion euros will be needed to capture and store CO2 in order to achieve climate neutrality, as not all industrial emissions can be avoided. The total investment requirement per year therefore amounts to 5.5 trillion euros or around 200 billion euros. Euro or around 200 billion Euro per year. The NRW share scaled to the transformation path to 2045 and extrapolated to all sectors would then be around 90 billion euros per year (Allianz Trade, 2023).
- In 2021, the Prognos Institute, Nextra Consulting and the Institute for Sustainable Investments conducted a study on behalf of KfW Bankengruppe, which forecasts that Germany will need to invest EUR 5 trillion in climate neutrality by 2045. Of this, EUR 3.8 trillion is accounted for by investments that are already planned. In addition, there are investments of 1.1 trillion euros to achieve climate neutrality. The 3.8 trillion euros are divided into investments of 2.1 trillion euros in transport, 840 billion euros in energy, 620 billion euros in industry and 237 billion euros in trade, commerce and services. Added to this are the additional investments of EUR 153 billion in the transport sector, EUR 397 billion in the energy sector, EUR 462 billion in industry and EUR 113 billion in trade, commerce and services (Nextra Consulting et al., 2021). Proportional investments of €71 billion per year can be calculated for NRW.
- The older studies by the Global Commission on the Economy and Climate (GCEC), the Organization for Economic Cooperation and Development (OECD) and the World Economic Forum (WEF) calculate the required investments in climate neutrality by 2030 (GCEC, 2016; OECD, 2027; WEF, 2013). However, due to the rise in commodity prices since then, investment expenditure will be higher than estimated by these studies. Extrapolated using the Eurex Dow Jones-UBS Industrial Index and broken down to NRW, the GCEC figures result in an investment requirement of 74, the OECD figures in an investment requirement of 75 and the WEF figures in an annual investment requirement of €89 billion per year.
- The climate pathway study by the Federation of German Industries (BDI) and the Boston Consulting Group (BCG) identifies additional investments of EUR 860 billion by the 2030 milestone, of which EUR 50 billion is attributable to industry, EUR 220 billion to the transport sector, EUR 175 billion to the building sector and EUR 415 billion to the energy sector (BDI/BCG, 2021). If this investment requirement is extrapolated to 2045 and supplemented by a calculation of replacement investments, NRW would account for investments of €91 billion per year (BDI/BCG, 2021).
- The study by the Institute of Energy Economics (EWI) calculates that new investments amounting to EUR 1.9 trillion will be required across Germany for the corporate sector and the household sector combined by 2030 (Schnaars et al, 2023). Extrapolated to 2045, this would correspond to investments of €81 billion per year for NRW, which would have to be made by companies and households.
- As Table 1 shows, the average investment requirement for NRW to achieve climate neutrality across the studies is around €80 billion per year for the years 2024 to 2045. Based on the emission shares of the European Commission's EDGAR database cited above, the investments could be broken down into EUR 19 billion per year for industrial facilities, EUR 17 billion for the transport sector, EUR 15 billion for buildings and EUR 29 billion for the energy sector.
3. Investment needs in digitalization
Studies estimating the need for investment in digitalization are much rarer in comparison to climate neutrality. While there is a global target for climate neutrality that must be achieved by a certain date, companies' investments in digitalization are primarily driven by the market. Politicians also want to drive digitalization forward, and the EU has also set targets in this area. However, these are not being driven by regulation. Unlike the studies on achieving climate neutrality, studies that calculate the need for investment in digitalization do not assume a transformation path, but instead continue existing investments in digitalization.
The International Data Corporation (IDC) regularly forecasts global investment in digital technologies and services. For the years 2024 to 2026, IDC experts expect investments worth 2.7 trillion euros worldwide (IDC, 2023). For Germany, this would result in investments of EUR 110 billion per year in proportion to the size of the economy as measured by gross domestic product. This would correspond to annual investments of EUR 23 billion in digitalization in NRW (based on the share of economic output). With regard to the rapid technological trends in the field of digitalization, it is less possible to speak of companies catching up. Rather, it must be assumed that companies are continuously adapting to further developments in the field of digitalization. For this reason, it is assumed that the need for investment in digitalization can continue until 2045.
4. Challenges for transformation financing
Based on these calculations, over €100 billion would have to be invested annually in NRW for the climate-neutral and digital transformation alone. Given that experience has shown that companies are not able to finance all investments with their own funds, but also rely on bank loans for financing, banks would have to increase their regulatory risk assets along the transformation path. The current credit financing ratio of industrial companies is 7%, while in the energy industry and the building sector it is 19% each (Deutsche Bundesbank, 2024). In the building sector, financing is also provided with a debt financing ratio (2020). This makes it possible to estimate the increase in banks' risk assets along the transformation path. The sectors are therefore likely to demand around EUR 25 billion in loans each year to finance these investments, provided they do not increase their leverage. However, even with a given debt ratio, this high amount is likely to indicate that there could be financing gaps, particularly for small companies that cannot use green bonds to finance their investments in climate neutrality like large companies due to a lack of access to the capital market. A noticeable expansion of credit is therefore necessary for banks, but this is challenging as they have to back their credit expansion with additional equity for regulatory reasons. The question of whether potential financing bottlenecks occur therefore depends crucially on how well the banks succeed in increasing their equity or releasing equity that is already tied up in other ways, e.g. through loan securitization (Demary/Taft, 2023).
