According to Robert Dur, Professor of Economics of Incentives and Performances at Erasmus School of Economics, and his partner Sandra Phlippen, budgetary rules are the key to a successful climate policy. This requires substantial investments worldwide, but the longer we wait, the bigger the challenge becomes.
Large-scale polls show that few Europeans are seriously concerned about the climate. They are more concerned about health care, social security, rising cost of living and unemployment. What we are wary of is that the future generation will not be left with a large public debt. According to Robert Dur, we apparently do care about future generations. But he wonders whether we are making the right decision by being frugal with money, but not with the climate?
Renewed budget rules
Money must be spent on climate policy and, according to Dur, a high public debt is acceptable in return. According to Dur, the solution lies in the budgetary rules. The current European budgetary rules, with a maximum deficit of 3% and 60% public debt, give the message that reducing deficits and debts must have priority. This makes a debt-financed climate policy largely impossible in practice. Robert Dur argues in favor of a green version of the golden financing rule: governments can borrow unlimited amounts for green investments, on top of the 3% deficit that is already allowed. With this rule, a hefty climate policy is not accompanied by a substantial increase in the burden, which will benefit electoral feasibility.
Green investments
A practical problem with the green financing rule is determining what is and what is not a green investment. Nowadays, there is an advanced measurement system that can be used to distinguish between government bonds for green and grey investments. Under the current budgetary rules, all these government bonds count in the same way, but when applying the green guilder financing rule, this changes: loans can be made for green investments, not for gray investments.
Investing in the future
Robert Dur takes it one step further. ‘Why should we apply the golden rule of financing only to green investments and not to all public investments?’. He is referring to, for example, education and research costs and infrastructure. With all these expenditures, the benefits are mainly reaped in the future. By allowing for borrowing, such investments can be encouraged, which will make future generations better off, if the return on these investments is sufficiently high.
In order to meet the climate targets, a major move still needs to be made, also in Europe. The green financing rule creates room to do so and signals that it is morally acceptable to increase the deficit in order to save the earth. In this way, the financial burden of climate policy will be passed on to the next generation. This is not pleasant, but according to Dur it is still better than the scenario of a small government debt combined with irreversible damage from climate change.
Onze kinderen zien ons liever zuinig op het klimaat dan zuinig met geld
- Professor
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The opinion piece of Robert Dur in Het Financieele Dagblad can be downloaded above 17 September 2020 (in Dutch).
