Climate Protection Brings Economic Benefits to Europe

An IMK study shows that the EU will benefit economically if it becomes carbon neutral by 2050. The decisive factor here is not only CO₂ pricing, but also an EU investment fund.

Climate protection makes economic sense. This is the conclusion of a study published in September by the Macroeconomic Policy Institute (IMK) of the Hans Böckler Foundation. The researchers show that the EU will benefit economically if it consistently pursues its goal of CO₂ neutrality by 2050.

EU Needs Investment Funds

According to the study, the costs of the green transition are lower than the damage caused by progressive climate change. The decisive factor here is not only CO₂ pricing, but also an EU-wide investment fund that provides a more efficient framework for the economy. This applies even if additional loans are necessary to achieve this.

The study focuses on two scenarios: In the positive scenario with globally ambitious climate policy similar to that of the EU, the GDP of the eurozone would be one percent higher between 2036 and 2040 if €170 billion were invested annually in climate-friendly infrastructure. By 2051, the lead would increase to just under five percent. Even in the scenario with lower international participation, an investment fund improves economic strength in the long term, making the transformation profitable.

Inaction Results in High Long-Term Costs

The calculations are based on the internationally recognized NiGEM macroeconomic model. To quantify the economic damage caused by insufficient climate protection efforts, the researchers draw on data from the Network for Greening the Financial System (NGFS) and the Potsdam Institute for Climate Impact Research, among others.

Our results show that CO₂ taxation initially has a negative impact on GDP and causes inflationary effects. However, when climate change and the associated long-term damage to economic growth are taken into account, it becomes clear that inaction will have far more serious consequences in the future," write the study's authors Sebastian Watzka, Christoph Paetz, and Yannick Rinne.

Follow-Up Costs of Fossil Power Use Hard to Estimate

“The use of fossil and nuclear power is associated with undesirable side effects and thus also with additional costs. Even with the conventional, i.e., non-climate-related, damage caused by fossil power use, high follow-up costs are to be expected in the long term,” notes Springer author Thomas Göllinger with regard to the energy transition. In mining in particular, this is referred to as the “perpetual costs of coal mining.”

“In combination with the probable—but also as yet unquantifiable—damage and follow-up costs of climate change, these external costs retrospectively make the former use of coal and thus also the former generation of electricity in coal-fired power plants considerably more expensive,” says the expert. In concrete terms, this means that it is still not possible to reliably calculate how expensive the generation of one kilowatt hour of coal-fired electricity actually was 20 or 50 years ago, including external costs. “The same applies to the use of nuclear energy,” writes the expert, referring to the extensive state takeover of liability premiums and the as yet incalculable future disposal costs.

Criticism Ignores Climate-Related Damage

The IMK study emphasizes that the transition costs cited by critics can also be significantly reduced through European measures. A joint fund would enable more efficient investments than individual national measures. Programs such as Next Generation EU or the Recovery and Resilience Facility (RRF), which have contributed significantly to cushioning the economic impact of the coronavirus crisis, could serve as models, according to the study's authors.

Paetz, Rinne, and Watzka reject the frequently voiced criticism that credit-financed investments are not sustainable, as this ignores climate-related damage and transition costs. They argue that false conclusions are being drawn and that both the available fiscal policy leeway and the impact on economic growth are being misjudged. “Decision-makers must recognize that inaction on climate change is not a budget-neutral option. It leads to higher debt and lower growth,” they conclude.

Fear of Rising Energy Costs

Nevertheless, such findings do not seem to resonate with consumers or politicians, as Moritz Kraemer, chief economist at Landesbank Baden-Württemberg (LBBW), notes. Environmental and climate issues were only of secondary importance in the elections at the beginning of the year. “Only one in four saw climate change as one of the top three issues influencing their voting decision,” the LBBW economist said in a statement at the beginning of October. According to an April survey by the Ipsos opinion research institute, only 41 percent of German citizens believe that Germany should do more to combat climate change. “This puts Germany in last place among all 32 countries surveyed,” Kraemer said.

Fifty-nine percent of all Germans believe that the switch to renewable energies will lead to higher energy prices—more than in any other country. And half of all German citizens believe that electric cars are just as bad for the environment as conventional vehicles.

Politicians “Uninspired”

Kraemer also finds political decision-makers lacking in commitment. “It is not only the new federal government that is strikingly uninspired and unambitious when it comes to climate issues. Last month, Brussels was unable to communicate clear emission reduction targets to the UN for the climate summit in November,” criticizes the economist. By 2035, the EU wants to emit between 66.25 percent and 72.5 percent less greenhouse gases compared to 1990. “Imprecise and precise at the same time!”

No continent is warming as rapidly as Europe. “That's one more reason to see the challenge as an opportunity. Climate and environmental technologies will be a global growth industry in the coming decades,” believes the LBBW economist. “Those who have the solutions in climate technology will succeed.”

This is a partly automated translation of this german article.