Weekly Commentary

Climate change: No more excuses

September 2023 It's burning on all fronts. Nevertheless politicians do not feel too much pressure to combat climate change. Why is that?
A comment from Dr. Cyrus de la Rubia

Dr. Cyrus de la Rubia

The devastating forest fires in Greece, Canada and Hawaii, the heat records this summer, parched soils and the accumulation of heavy rainfall events such as in Spain show one thing: Climate change is having exactly the effects that have been predicted at every climate conference for decades. In fact, policymakers should now go "all-in" and concentrate all resources on slowing down climate change. There should be a realization among the population that action must be taken now, that there are no more excuses. But that is not what is happening. Instead, there are power games going on in politics, parties that deny climate change are gaining considerable support in Europe, and climate change activists (“Klimakleber”) - who are understandably controversial - are being declared public enemy number one. Meanwhile, the party-politically independent Expert Council for Climate Issues certifies that the German government is falling well short of the goals it has set itself for both the heat and mobility transformation.

Politics can't do a damn thing anyway

What's going on? Climate change has two characteristics that are difficult to deal with for politicians who usually make short-term calculations: First, it is global, and second, it reacts to today's measures with a delay of many years. This does not seem to fit in with the efforts of politicians to be re-elected at the next election.

Why should politicians enforce environmental laws for Germany that burden the economy and the people when China is simultaneously announcing the construction of several dozen coal-fired power plants and Germany is "only" responsible for around 2% of global CO2 emissions anyway, people like to argue.

The argumentation on the second point is similar: Even if the entire world were to reduce CO2 emissions to zero overnight, this would not start to slow down climate change a decade or more from now. So why go all out now, preaching renunciation and thereby alienating voters?

The standard excuses

Both arguments are highly problematic. Among other things, the first one overlooks the fact that Germany joined the Paris climate protection agreement for a good reason and has thus made a binding commitment to the climate targets. This is because a multilateral approach is the only way to limit the global impact of climate change. If we are now visibly heading for a missed target, this will damage the agreement in general and Germany's reputation. If individual politicians try to talk their way out of it, either by pointing to a lack of money, or by saying that they don't want to drive up inflation any further, or that they need to be open to new technologies, then this is nothing more than a political maneuver. Because in fact, what is at stake here is not primarily money, inflation or technology, but political willingness.

Stranded Assets

The argument is not only lame because of the international obligation that our state has entered into. There are also urgent economic reasons for pushing ahead with the climate turnaround at high speed. Companies that cling to fossil strategies will in all likelihood fall behind and gradually be filtered out of institutional investors' portfolios as stranded assets. Or take the example of real estate. Poorly insulated buildings can only be sold at high discounts or not at all. In short: sustainability will increasingly be a basic requirement to survive in the market. This also makes it clear that technologies and investments that can contribute to this sustainability should be massively promoted today in order to stay ahead of the international competition.

Sometimes it's the supply chains, sometimes it's the high interest rates

The argument that more investment would drive inflation also falls short. If you look at price developments, there is actually deflation for many goods at the moment, because supply chains have relaxed and the post-Corona demand boom for fitness equipment, garden furniture and new kitchens is over. Of course, labor is also needed if more investment is to be made, and this can in principle lead to higher wages. However, people are currently being laid off in the construction sector, which is likely to be more heavily used in this context. Overall, in the current economic situation, the price pressure resulting from the additional investment is likely to be weak or remain manageable.

Thinking about future generations

People also like to point out that interest rates are so high now and would put an excessive burden on public budgets. Apart from the fact that Germany has refused for years to use the long-standing negative interest rate environment for a massive investment offensive, there is no need to pretend that the higher interest rate level is a temporary phenomenon. On the contrary, we expect the European Central Bank to leave the key interest rate at the current level of 4.25% or even slightly higher until the end of 2024 and that long-term yields still have some room to move up. We should get used to a "new normal" on the interest rate front.

But what about the debt? Won't it get completely out of hand if we make debt-financed climate investments today and future generations then have to cope with the high burdens? No, on the contrary. If we don't act, future generations certainly won't thank us for having to deal with billions of euros in rising climate-related damage year after year.

Not everything is bad

Now, it is certainly not right to write at this point only about what was omitted. Some things have indeed happened. The EU, for example, has made an important step forward with the EU Next Generation program, which supports investments in climate protection and digitalization with a total of 750 billion euros. In Germany, things are happening with regard to the installation of wind and solar power plants, and something is also happening in other countries. Quite obviously, however, the measures are far from sufficient to achieve the agreed reductions in CO2 emissions. The processes need to be accelerated significantly at national and European level. The spirited packages of measures pushed through after the financial market crisis of 2008/2009, after the Corona outbreak, and also in response to the Ukraine invasion by Russia show that politics can, if it wants to. Perhaps the current climate-related weather disasters will have their good side after all and trigger appropriate action.

Dr. Cyrus de la Rubia

Chief economist


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