“There are no solutions. There are only trade-offs.”... Said once a fella whose wisdom I could never reach. The unfortunate thing though is that fewer than expected seem to comprehend this concept. What triggered this blog is the recent budget crisis in Germany and its impact on funding green projects. In short, the German government has on one hand set a debt brake (stipulating the maximum level of deficit) and on the other earmarked certain funds for energy transition (renewables, green industry etc). The two forces clashed, leading to a crisis and the government seeking a way out.
The above illustrates in the most evident way that setting very ambitious climate targets can be really difficult to fund. Green technologies are still more expensive than the respective conventional ones and therefore, government support is needed to fill the financial gap (in the form of loans, subsidies, direct investments etc). Let’s examine the tools governments have in their arsenal in order to provide fiscal expansion (and thus, fund green development).
- Borrowing - Everyone likes to borrow money but no one likes to pay back. Increasing a country’s debt is simply brushing the problem under the carpet. Eventually, the debt will have to be repaid leading to a very tight budget and potentially austerity measures. Since the above is unpopular, it’s unlikely for any politician to tackle it properly unless absolutely necessary. This shortsighted approach leads to a dead end and potentially to a massive crisis. Coming from a country (Greece) that suffered severely from reckless borrowing, I can assure you it’s not fun.
- Taxing the rich - As much as this sounds very appealing, there are two reasons why it has failed miserably. Firstly, when you overtax the productive part of the economy, you disincentivize business activity. Reduced business activity leads to lower (even negative) growth which, in turn, limits tax revenues. On top of that, the rich aren’t that rich. The more you narrow one’s definition of ‘rich’, the more you restrict the ability of the state to gather sufficient funds. Even if we were to impose an extreme tax rate on the very few at the top, it would still not match the ability of a broader pool to pay taxes. This leads to the final option.
- Taxing the many - Unpopular as it sounds, this is the only viable option. This is therefore the reason why most governments resort to this approach when they can’t borrow. If the taxes are already high then a choice needs to be made between funding energy transition and other services.
It’s important for governments to approach energy transition with realism and set priorities in a sensible manner. A few takeaways below:
- Accept reality and be more transparent. On one hand, the overambitious targets set need to be compromised and the whole planning cannot be disentangled from the rest of the economy. On the other hand, the public in general needs to be informed in a clear way that the energy transition means higher cost taxpayers. This is particularly important for young people who tend to be more keen on climate change mitigation, while at the same time they are facing an unprecedented generational wealth gap.
- Plan energy transition more sensibly and focus on low-hanging fruits. For example, lowering energy consumption can be achieved even at zero cost to some degree. Encourage carpooling, remote work and a circular economy should be prioritized over expensive technological changes.
- Promote RnD initiatives that can help lowering the cost of green technologies. Then more people will use them without government intervention
- Focus on economic growth. Greater economic activity leads to greater tax revenues without raising tax rates. This is of course challenging in an unstable global environment but there is always space for improvement in the current policies.?
- Prioritize demographics. It’s surprising how much governments and media focus on the climate crisis (which is undoubtedly a big problem) but much less (and only recently started) on the demographic crisis. An aging population requires more services (e.g. medical) putting strain on national budgets, and at the same time it limits productivity and consequently tax revenues.?
In conclusion, it’s important to realize that there is no silver bullet and as much as we like to talk about the opportunities that energy transition creates, we tend to neglect the (far greater) challenges on the path. Trade-offs need to be looked into carefully and priorities set accordingly. Green transition won’t happen by itself. We need profitable businesses to drive growth and prudent policies that don’t strangle the economy. With consideration of the above, it’s possible to face energy transition from a much more realistic lens.
