The New Paradigm Papers of the Month of September

What does a secure, liveable and sustainable future cost? And how do we finance it?

Dezernat Zukunft

In his recently published report to the EU Commission, Mario Draghi called on Europe’s leaders to provide more money for modern infrastructure, better competitiveness and more climate protection. Experts from the German think tank Dezernat Zukunft have estimated the funding requirements in Germany in this regard: according to these estimates, around 782 billion euros will be needed by 2030 to modernise the country and overcome the crisis. In contrast to recent estimates by the BDI (376 billion) and the IMK (584 billion) on the need for public investment alone, the department’s researchers also include the health sector, research, defence and other expenditure for internal and external security. Climate protection and adaptation account for the largest share (245 billion). Around 140 billion each is earmarked for digitalisation, education and research, while other key areas are transport (165 billion) and defence (103 billion). According to the authors, part of this requirement could be met by reforming the permitted financing within the framework of the debt brake, but this would also require additional borrowing. This would also make economic sense, as investment in the modernisation of the country would lead to higher economic growth and thus to lower debt ratios in the long term. However, this would also require a reform of the debt brake in its current form.

To background paper (in German)

To policy paper (in German)

High and Rising Institutional Concentration of Award-Winning Economists

Richard B. Freeman, Danxia Xie, Hanzhe Zhang, Hanzhang Zhou

According to a new study, top-level research is much more concentrated in economics than in other disciplines. A group of authors led by Richard B. Freeman analysed the academic careers of around 6,000 prizewinners from 18 areas of the natural sciences, engineering and social sciences. The world’s most renowned economists work for the most part at a few elite US universities (Harvard, University of Chicago, MIT, Stanford, Princeton, Yale, UC Berkeley and Columbia University). Nobel laureates in economics spend on average half of their academic time at these eight institutions, which account for only three per cent of all institutions with internationally renowned academic awards. Interestingly, the concentration in all other fields is low and tending to decline, suggesting that knowledge production in science is generally becoming more decentralised. In contrast, the economic sciences show a high and increasing institutional concentration. According to the authors, this trend could further restrict research on non-mainstream topics and influence the direction of future economic research and thinking.

Full study

Class consciousness and voting decisions. Class as a political compass?

Linus Westheuser and Thomas Lux

The question of how politicians can win back the trust of citizens has not only arisen since the state elections in eastern Germany. This FES study shows that centre-left parties in particular are increasingly losing their traditional voter base to the AfD. In a survey of around 5,000 citizens last year, the authors found that the AfD received the most support from the working class. Since 2014, the SPD’s share of the vote among this group has halved, while the AfD’s share of the vote has more than tripled in the same period. In other European countries, too, traditional working-class voters have increasingly turned their backs on traditional parties since the 1990s in favour of more radical right-wing parties.

Fully study (in German)

Distributional Impacts of Heterogenous Carbon Prices in the EU

Magnus Merkle and Geoffroy Dolphin

Based on new data on the distributional effect of CO2 prices, IMF researchers show that European emissions trading has so far had a regressive effect, i.e. has tended to penalise the less well-off. As they spend a larger proportion of their income on CO2-intensive goods (e.g. energy, food), low-income households are disproportionately affected. In contrast, higher-priced consumption (e.g. air travel, imported goods) is often excluded from emissions trading. To ensure that climate protection relieves the burden on lower and middle incomes in future despite rising CO2 prices, the authors recommend extending emissions trading to more sectors and better international coordination at European and, if possible, global level. They also propose a compensation mechanism in which the revenue from carbon pricing is redistributed to low-income households. According to the authors, all of these measures could contribute to a progressive distributional effect of climate protection.

Full study

Carbon pricing: acceptance and cost perception after the 2024 price increase (in Germany)

Jan Behringer, Lukas Endres and Maike Korsinnek

A new survey in Germany also casts doubt on the sense and purpose of a climate policy that overly relies on carbon pricing. According to the study, three-quarters of respondents, particularly low-income households, reject carbon pricing in the transport and building sectors. In addition, most respondents overestimated the current additional burden and underestimated the expected future price increases for petrol, diesel, heating oil and gas. On average, respondents estimated the current additional burden (around 400 euros) to be twice as high as the actual costs (around 200 euros). According to the IMK model calculations, the average burden on households could be around €850 from 2027 under the reformed European Emissions Trading System (ETS 2) if the CO2 price rises to around €200 per tonne. In the survey, this cost development was significantly underestimated at 550 euros by respondents. To ensure that climate protection does not continue to lose support among the population, the authors recommend a compensation mechanism that relieves the burden on lower and middle income groups, as well as more public investment to support the green transition. Exactly how to design a compensation mechanism to achieve a progressive distribution effect is not a trivial question. In its previously discussed form of a per capita payment, the measure would indeed support low-income consumers. However, an IMK study  on the heating and transport sector shows that households in the middle of the income distribution, such as low-income homeowners unable to finance climate-friendly refurbishment and heating replacements, would be affected disproportionately.

Full study (in German)