The funding nightmares of Europe’s climate dreams

The urgency of the global climate crisis is driving Europe’s transition to a renewable energy system. However, the investment gap for adding renewable technologies and for updating their energy networks is gigantic. Seden Anlar stresses the need for new EU funding for climate goals and just transition.

Each month seems to set a new temperature record, echoing the dire warnings scientists have been giving us for decades: climate change is not just knocking at our door – it’s barging in, fueled by our reliance on fossil fuels. As temperatures climb and climate disasters become more frequent, the global outcry for climate justice has grown louder and more urgent.

In the midst of a fossil fuel crisis exacerbated by war, the compelling evidence from the International Panel on Climate Change (IPCC) has injected new urgency into discussions about decarbonisation. Renewable energy has quickly moved from a hopeful possibility to a necessary solution.

Yet, despite this urgent call to action, as of 2020, renewable energy made up a mere 19.1% of our global energy consumption. Projections indicate that this figure needs to increase to at least 89% by 2050 to keep global temperature increases below the critical threshold of 1.5°C, as mandated by the Paris Agreement. Notably, this projection by the International Energy Agency (IEA) includes a doubling of nuclear power by then.

The global push for renewables

The call for increased renewable energy has not gone unheard. Momentum in renewable energy is gaining global traction, significantly accelerated in 2023, with a 50% increase in added power generation capacity from the previous year. This surge, the fastest in three decades (as reported by the IEA), saw all-time highs in renewable energy capacity across Europe, the United States and Brazil, signaling a worldwide surge in clean energy adoption.

At the 2023 COP28 summit, this momentum was mirrored in political discussions, where global leaders unified around the urgent need to reduce emissions and fast-track the clean energy transition. Sultan Al Jaber, the COP28 president, advocated for tripling renewable energy output and doubling energy efficiency by 2030. However, these goals face significant hurdles as financial contributions fall critically short of what’s required for such transformative goals, revealing a stark disconnect between policy ambitions and actual funding.

The IEA has repeatedly highlighted that the integration of renewable energy into the global energy supply is insufficient to avoid a climate catastrophe, marking a crucial fault line in our climate fight, as outlined by IEA’s Executive Director Fatih Birol at the 2024 World Economic Forum in Davos . Investment in renewable energy remains critically low – over USD 600 billion was invested in 2023; yet to meet the necessary climate targets, investments need to double to about USD 1.3 trillion annually.

The distribution of these investments is also skewed, with the vast majority concentrated in China, Europe and the US, while Africa and the Middle East receive less than 4%. This uneven allocation highlights the growing inequity in clean energy access, as underscored by the Energy Transition Index.

Recent discussions at international summits have shown promise, with proposed new tax regimes on shipping and financial transactions potentially offering a significant boost to climate finance if implemented fairly. Yet no concrete agreements have been concluded, leaving only vague plans without guaranteed outcomes.

Mind the gap

Europe is at a pivotal moment in its renewable energy transition, reflecting a broader global shift. The war in Ukraine has significantly accelerated Europe’s move away from fossil fuels, particularly in light of the need to reduce dependence on Russian energy sources. This urgency is underpinned by EU policies like REPowerEU, which have catalysed substantial advances.

A prime example is Greece, where, in October 2022, the country met its entire electricity demand with renewables for several continuous hours. By 2023, renewables such as wind, solar and hydro accounted for an impressive 57% of Greece’s electricity mix, showing the practical benefits and viability of a robust renewable energy framework.

However, despite these achievements, Europe faces significant infrastructural and financial challenges. The bloc’s electricity grid, originally designed for a different energy era and suffering from previous underinvestment, is too centralised, outdated, lacks sufficient capacity in the right locations and struggles to manage the rapid increase in renewable energy production. A 2023 report estimated that approximately EUR 584 billion is needed by 2030 to upgrade and expand the grid adequately to accommodate this influx of green energy. Without this essential investment, Europe’s energy transition is leaving its vast potential unrealised.

The insufficient investment in grid infrastructure not only the integration of renewable energy sources but also poses financial risks. Current grid capacity issues create bottlenecks, preventing energy from being efficiently distributed or utilised, leading to financial losses and eroding investor confidence. This situation also highlights the interconnectedness of energy production, infrastructure and financial systems, emphasizing the urgent need for comprehensive planning and robust investment.

In Spain, the costs of maintaining grid stability now exceed annual investments in grid infrastructure. As the European renewable market increasingly relies on solar panels, the divergence in EU countries’ plans from up-to-date projections – by as much as 82% – raises concerns that grids may be unprepared for the anticipated solar surge. However, there are notable exceptions, like Croatia, Denmark, Finland and the Netherlands, whose grid plans are well-aligned with the expected increase in renewables.

The EU’s renewable energy investment gap is not just a fiscal challenge – it mirrors a broader climate investment deficit in Europe. According to the European Climate Investment Deficit report, an annual investment of EUR 813 billion is needed across various sectors for the EU to meet its 2030 climate and decarbonisation targets.

Bridging the investment gap

The European Union stands at a crucial juncture in tackling climate change. Considering the projected cost of climate damages, estimated to be between USD 1.7 trillion and USD 3.1 trillion per year by 2050, the urgency for substantial financial commitments is clear. Projections aside, over the past two decades alone, extreme weather events have cost the global economy approximately USD 2.8 trillion, highlighting the financial burden of climate inaction.

Recent policy decisions, however, such as the European Parliament’s approval of reformed EU Fiscal Rules, have cast doubt on the EU’s commitment to its climate ambitions as it has been seen as a push for austerity. This approach risks undermining the investments crucial for transitioning Europe’s economy towards sustainability and climate neutrality. Climate campaigning organisations have suggested that Member States explore alternative financial avenues, such as taxing the wealthiest and heaviest polluters, to avoid cuts in vital social and climate spending.

As the EU approaches its next strategic agenda for the next legislative term after the European elections, it is crucial to prioritise the adoption of a new fund for climate goals and just transition. This move would address immediate financial gaps and consolidate the EU’s commitments to the Paris Agreement, ensuring that the EU not only sets ambitious climate goals but also fully funds and achieves them.

The views and opinions in this article do not necessarily reflect those of the Heinrich-Böll-Stiftung European Union.