Blog Post

Greening the Debt

Jakob von Weizsäcker believes that the enormous additional debt due to deficit spending should be repaid with additional green revenues which should be raised as soon as the economies recover. An international agreement should be sought on this approach, enabling countries during the present crisis credibly to commit to environmental and fiscal sustainability at the […]

By: Date: April 6, 2009 Topic: European Macroeconomics & Governance

Jakob von Weizsäcker believes that the enormous additional debt due to deficit spending should be repaid with additional green revenues which should be raised as soon as the economies recover. An international agreement should be sought on this approach, enabling countries during the present crisis credibly to commit to environmental and fiscal sustainability at the same time.

The global economic crisis and climate change are probably the two signature challenges of our time. Luckily, there are ways to make our responses to these challenges mutually reinforcing.
One approach is to green the expenditures of the fiscal stimulus packages, as called for by the final communiqué of the G-20 summit.
But the room for maneuver here is limited. An estimated 15 percent of the stimulus packages are already green. And because it is the primary objective of the fiscal stimulus to support the economy in the short run, it is not possible to devote a much larger proportion to the longer term objective of fighting climate change.
However, there is another way to green the stimulus: greening the enormous additional debt due to deficit spending. In 2009 alone, E.U. countries will pile up a stimulus debt of around €115 billion, or 0.9 percent of GDP, with the United States adding twice as much — an estimated €220 billon, or 2 percent of GDP. These debts could be “greened” by a firm international commitment to repay them exclusively with additional revenues from CO2 taxes and emissions cap-and-trade schemes.
This is what I propose should be done.
The additional green revenues would be raised as soon as economies recover enough to repay the stimulus debts. The time-path of debt repayment could be explicitly linked to the timing of the economic recovery. And once the stimulus debt has been repaid, the green revenues would be used to reduce the fiscal burden on labor. Such a shift from taxation that reduces desirable employment to taxation that reduces undesirable pollution will lead to welfare gains. The envisaged increase in green revenues is ambitious, but not utopian. In the E.U., green taxes already make up 2.6 percent of GDP — substantially more than the annual size of the stimulus packages to date. Green tax revenues in the United States are far lower, but the Obama administration is already working on a cap-and-trade scheme that could generate the required revenues.

Repaying stimulus debt through green taxes has a number of advantages:
First, there are efficiency reasons to complement the carrot of green subsidies with the stick of green taxes. The latter clearly addresses the underlying problem, namely that private agents do not fully take into account the negative climate externality of CO2 emissions. By contrast, the carrot of green subsidies is better suited to dealing with a narrower and positive externality — the spill-over effects of technological innovation aimed at reducing CO2 emission.
Second, green revenues not only improve environmental but also fiscal sustainability. A credible commitment by countries under fiscal pressure on how they will repay their debts could serve to reassure financial markets. Even countries like Ireland without the fiscal room for maneuver for discretionary fiscal measures might be tempted to participate in the greening of part of its debt. Third, green debt makes the case for coordination of fiscal stimuli even more compelling. Such coordination could address fiscal and environmental free-riding at the same time: All countries that commit to a fiscal stimulus would thereby automatically commit to increase their CO2 taxes at a later stage to service their green debt.
Only a couple of years ago, this proposal would have been completely unrealistic. Ironically, the threat to fiscal sustainability during this economic crisis may be decisive in helping our economies to move toward environmental sustainability.

Jakob von Weizsäcker is a resident scholar with Bruegel, a think tank in Brussels partly funded by 16 E.U. member governments.

This comment was published in the New York Times.


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