Green Government Debt for the ‘Green Deal’?

The new Commission has chosen a compelling leitmotif for its term of office. The ‘Green Deal’ is to kick-off the transition of Europe towards a climate-neutral continent. The objective is highly ambitious and will absorb substantive financial resources. It is not surprising that the potential role of higher public debt is discussed to provide finance for climate policies. The European Central Bank is increasingly requested to provide green finance through its asset purchase programmes. In the reform discussion of the Stability and Growth Pact one of the prominent green ideas is to exclude national investments into CO2 emission reduction from the deficit calculation. Similar suggestions are made in national debates, for example, with respect to a possible lenient treatment of ‘climate bonds’ in the German constitutions debt brake.

But does an ambitious climate policy really provide compelling arguments for higher public debt? As plausible as the basic idea of ​​ecological debt sounds, it nevertheless contains several logical fallacies. Its first mistake is to use ethical obligations to justify the accumulation of public debt. The state carries out many functions that society regards as moral imperatives: from health care and poverty reduction to help for refugees, disaster relief, and development aid. But an ethical obligation cannot be served by funding the costs of its fulfilment with debt. We might then praise each other today, but others, the future generations, would have to pay for our good deeds. This is not what we would usually call an ethical behaviour.

The second mistake is the idea that measures against climate change are profitable investments that ultimately pay for themselves. It is true that the benefit they produce is the slowdown of global warming and the cost savings that result. But this idea fails to recognize the key problem of climate policy: mitigating climate change is a global public good. While reducing global warming is highly profitable for the world as a whole, an isolated European approach won’t see much benefit from its own action. This holds even more for uncoordinated action of EU Member States. Hence, with respect to its impact on debt sustainability, debt-financed climate policy is hardly more favourable than debt-financed welfare spending. It puts a strain on debt sustainability because the debt increase is unlikely to have a directly positive effects on growth and tax revenues. To some extent, the political debate seems to mix up the morality of public spending with its sustainability. Any debt sustainability analysis has to ask simply to which extent future tax revenues are sufficient to cover public spending. A spending increase that does not reliably increase a country’s growth rate and tax potential will therefore damage creditworthiness. This holds independent from whether the analysis is undertaken by monitors in central banks, international organizations or rating agencies.

It is true, however, that Europe’s climate change efforts can be part of a strategy to influence the behaviour of other global players in international climate negotiations. In that case, European efforts to fight global warming may have an indirect impact on the world’s climate and thus yield an indirect benefit that may also be of a fiscal nature. But this calculation is fraught with many uncertainties. If the strategy fails and ultimately ineffective European climate policies are funded by debt, future European taxpayers will face a double burden: additional costs due to climate change and restricted fiscal leeway to adapt to climate change due to a higher national debt.

The profitability argument still appears in the debate in another variant. EU Member States have agreed to share and trade the burden of reducing emissions, so that countries that have exceeded their reduction target can sell their excess capacity to countries that have not met their target. If a single country like Germany fails to meet its target, the federal government may have to buy excess capacity for CO2 emissions from other EU partners. From a European perspective, however, this is a zero-sum game. Individual states may have a financial advantage if they exceed their goals. For the EU as a whole, however, burden and relief cancel each other out. Thus, the argument that climate policy is fiscally profitable falls apart as soon as one regards it at the European level.

Overall, fighting climate change is thus hardly a convincing justification to open new loopholes in European debt rules and fiscal or monetary institutions. Today’s generation has the obligation to make sure global warming is limited to a responsible level. And it is precisely today’s generation who has to bear the costs. Everything else is ethically as well as fiscally irresponsible.