Climate investment: How to finance the 2030 targets

Berlin, November 9, 2021. The new German government faces the challenge of providing sufficient public funds for climate protection while at the same time complying with legal regulations on new debt. An analysis by Agora Energiewende and Forum New Economy shows which fiscal policy instruments can be used to finance the necessary climate protection investments – around 46 billion euros annually by 2030 – whilst complying with the debt brake and without raising taxes. These instruments include increasing public investment via (partly) state-owned companies, reducing subsidies that are harmful to the climate, offsetting crisis-related losses in the 2022 federal budget, and further developing the calculation method for permissible new debt.

The new Bundestag, slightly later than usual due to the federal election, will pass the federal budget for 2022 early next year. The process of drawing up the 2023 budget and a financial plan for the years 2024 to 2026 will then begin. The exemption to the statutory debt brake still applies to the 2022 federal budget. From 2023, the statutory limit on net borrowing will apply again.

Strengthening public-sector companies and private-sector climate investments

Taking these framework conditions into account, Agora Energiewende and the Forum New Economy have presented a financing concept that rests on four pillars and enables future investments in line with the debt brake: The first pillar is strengthening the equity of public companies. For example, the modernization and digitization of the rail network can be financially supported by the federal government through an increase in Deutsche Bahn’s equity. In addition, the authors propose the establishment of new public companies, such as an infrastructure company to advance the development of a hydrogen economy. “Greater federal participation in public companies increases state assets. This allows future investments to be financed in line with the debt brake,” says Prof. Tom Krebs, Research Director of Forum New Economy.

The second pillar of the financing concept is the attractive promotion of private climate investments. This includes common financial instruments such as low-interest loans with repayment subsidies, accelerated depreciation and contracts for difference. A substantial part of the public financing required to promote private-sector climate investments in the next legislative period can be covered by funding already budgeted for, such as the economic stimulus package or European aid, as well as by the gradual dismantling of subsidies that are harmful to the climate.

Crisis compensation for a future-proof federal budget

Thirdly, the concept accounts for compensation for crisis-related losses in the public sector as part of the suspension of the debt brake for the 2022 federal budget: This should include financial compensation for institutions particularly affected by the corona crisis, such as the social security systems or the Federal Employment Agency. “To prevent permanent damage from the pandemic, losses from the crisis could be compensated in the 2022 federal budget. This creates more leeway for the upcoming investments in the future,” says Krebs. In addition, a reserve could be formed in this course to finance the reduction of the EEG levy in order to cushion the increase in energy prices – caused, among other things, by the pandemic.

Finally, the authors propose a further development of the calculation method for the so-called potential forecast, which has a considerable influence on the tax estimate and thus financial planning and permissible new federal debt. Accordingly, modernization investments in climate-neutral infrastructure and other growth-promoting structural measures should be included to a greater extent in the potential and tax forecast: Consistent application of this forward-looking method would increase estimated tax revenues by a total of around EUR 40 billion for the period 2023 to 2026.

The Impulse “Public Financing of Climate and Other Future Investments” was published in cooperation with the Forum New Economy. The 39-page publication presents a financial concept that can be used to finance the necessary climate protection measures up to 2030 while complying with the legal rules on new debt and without raising taxes. The publication is available for free download below.