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Public financing of climate and other investments into the future

by Tom Krebs, Janek Steitz & Patrick Graichen

PUBLISHED

1. NOVEMBER 2021

Abstract

Germany needs to increase green public investment at the federal level by 30 billion Euros per year to reach its climate goals. This paper discusses how to finance the additional investments without violating the constitutional debt brake. Three financing instruments are available to the German government. The first instrument is a debt-financed capital injection for public sector companies. The second instrument consists of a direct subsidy for green private investments combined with tax breaks for green private investments. The third instrument is the use of the exemption rule of the debt brake in 2022 to provide financing of investment in the subsequent years. The paper argues that the German government can finance all its green investment needs without violating the constitutional debt brake if it makes full use of the three instruments.
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KNOWLEDGE BASE

During the high point of market orthodoxy, economists argued that the most 'efficient' way to combat climate change was to simply let markets determine the price of carbon emissions. Today, there is a growing consensus that prices need to be regulated and that a carbon price on its own might not be enough.

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