Our children say: Don't just save us money. Save the environment

Blog -

The key to a successful climate policy can be found in budget rules. In other words: the Golden Rule of fiscal policy needs to be painted green. The resulting fiscal discipline and scope for investment make this a plan that politicians and voters can get behind.

We are worried about leaving our children with a large government debt, but we're not thinking about the climate. Sandra Phlippen Chief Economist ABN AMRO

For a successful climate policy, significant investments are needed worldwide. And sooner rather than later – the longer we wait, the more work is required to solve the problem. But large-scale surveys reveal that only a small minority of Europeans feel deeply concerned about climate change. Especially in the relatively cold countries not many voters are losing any sleep over it.

There are many more pressing concerns on a typical European's mind, such as health care, social security, the rising cost of living, and unemployment. And these survey results (2019) are from before the coronavirus crisis, so it goes without saying that in the midst of the pandemic, climate change is now likely even further off the radar.

It seems strange that we worry so little about leaving climate damage as our legacy to future generations, compared with our great concern that we're saddling these same generations with large government debts. This is an especially hot topic in cold countries. Clearly, we do worry about the adults of tomorrow. But are we making the right choice by saving them money, while neglecting to save the earth they will inhabit?

Of course, what's best for the next generations is that we leave them with a clean, debt-free government budget while also stopping harmful climate change in its tracks. However, that does not quite charm the voters.

What would our children rather inherit? Large government debts, or a ruined climate? Considering the catastrophic and irrevocable harm caused by climate change, the answer should be obvious. We need to put our money on a healthier climate policy, and if that means racking up higher government debts, then so be it. But how do we get there? How can we persuade politicians to shift their focus?

Revisiting budget rules

The key lies in changing budget rules. Currently, European budget rules (capping the deficit at 3% and government debt at 60%) send a clear message that reducing deficits and debts should be a high priority. As a result, it's practically impossible to finance climate policy with debt.

So the budget rules need to be overhauled. The time has come. Due to the coronavirus crisis, the EU Ministers of Finance have decided to temporarily suspend the budget rules, which will likely continue to be the case in 2021, according to Finance Minister Wopke Hoekstra as quoted in the Dutch financial newspaper FD. This could be the perfect opportunity to revisit and adjust the rules before they come into force again.

We are advocating a green version of the golden rule of fiscal policy: governments may borrow infinitely to fund green investments, on top of the currently allowed deficit of 3%. If this rule is adopted, a solid climate policy will not go hand in hand with higher taxes, which will make it much more viable electorally. In essence, the financial burdens of a healthy climate policy are passed on to the next generation. That's obviously not great for them, but the choice is between inheriting large government debts or inheriting modest debts in addition to irreparable harm to the planet we live on.

A practical issue in painting the golden rule green is that we need to establish what does and doesn't make for a green investment. This issue has already been encountered – and tackled – in the field of green bonds, a financing instrument that has been gaining traction among governments. Green bond investors have devised an advanced measuring system that can be used to distinguish government bonds relating to green or grey investments. As things stand now, these bonds are counted equally on the fiscal balance. However, if we apply the green golden rule, this changes: the nation may borrow money for green investments, but not (or not as much) for grey ones.

Fine-tuning

In case of concern that the deficit and national debt are rising too rapidly, the 3% deficit ceiling can be lowered –  to 2%, for example,  or even to 0% (in which case the nation may only borrow for the purpose of green investments). What's essential here is that the maximum deficit remains flexible based on the total volume of green investments. In other words, the desired net deficit and debt can be adjusted by raising or lowering the 3% deficit ceiling.

Why should the golden rule of fiscal policy only apply to green investments, and not to all government spending? For example education and research expenses, or infrastructure? All these expenses are primarily meant to provide benefits in the future. Provided that the return on investment is sufficiently high, allowing governments to borrow for these purposes would increase the amount of investment going this way, which directly benefits future generations.

When it comes to green investments, there is an additional reason to be flexible: they are intended to prevent irreversible damage to the planet. The urgency to exempt green investments outweighs that of other government investments.

Political forces

Early in February, before the pandemic, news spread that the European Commission wanted to adjust the fiscal requirements, but they had not yet developed concrete plans. The green golden rule might just be the reform that various major political forces in the EU could rally around.

Conservatives get to keep the fiscal rules and resulting discipline. The progressive wing gains the fiscal easing they have been advocating for. And the green parties? They will warmly welcome the increased scope for green investments.

In order to meet our climate targets, major efforts are required – in Europe, too. The green golden rule will not only create the necessary scope, but also send the message that it's morally acceptable to increase deficits if it means saving the earth. Our grandchildren will thank us. 


Sandra Phlippen is Chief Economist at ABN AMRO. She wrote this proposal together with her spouse Robert Dur, Professor of Economics at Rotterdam’s Erasmus School of Economics.

Share

Join the discussion

ABN AMRO would like to know your opinion, so below this article you can react to this article via Disqus. By doing so, you agree to the conditions for reacting to articles on our website.

More blogs