Fiscal policy and climate have something in common: how we approach them today could make or break our shared future. And yet, at a decisive point for climate action, governments still approach it as if arbitrary fiscal thresholds matter more than a liveable future. How come?
The European Environmental Bureau and the European Youth Forum’s ongoing webinar series “Fiscal Policies for a Sustainable Future”, aimed at youth and environmental activists, explores fiscal policy, its links to the climate crisis and reform proposals for the EU’s economic governance framework. Here, we review the key insights from the second webinar.
The nature numbers game
Our modern societies are used to borrowing from nature to build the world we want. It seemed we could keep doing this forever, but recently, nature started sending out bills.
Today, we know that reversing the climate crisis will require the world to spend an additional $3.5 trillion to $9.4 trillion annually until 2050. Massive investments are needed to decarbonise industry, buildings, transport and other sectors, ensuring they run on nature-positive renewables.
While global pledges might create an impression that we are getting there, since 2011 we have allocated a mere $4.8 trillion over a decade . We are firmly not on track, as the largest state polluters and 93% of companies are failing to meet their climate targets. And as 93% of EU citizens see the climate crisis as a serious problem, the window for action might close very soon.
With all the effort, commitments and care, how did we end up here?
The hesitance to invest
Although renewables have already outcompeted dirty energy, nearly half of Europe’s necessary investments in climate technologies might not have a business case until 2030. It is not because they are unnecessary but because their value remains largely invisible to the markets.
The hesitance to invest in climate sounds like common sense to many: too expensive, too early, and why don’t we rather invest in something more certain and profitable? The prevalent short-termism remains a driving force of daily decisions in business and politics, undermining our capacity to secure a more sustainable future.
Only recently have companies started seriously considering the importance of climate risks to their business model and operations. Still, before a new business mindset catches up with reality, we need governments to take the lead. Are they ready?
Fiscal rules vs climate realities
Looking closer at Europe, the green funding gap has been estimated at €855 billion a year (excluding transport and social investments). And while on the surface, we are taking the lead, there are a few things constraining investment.
The debt and deficit rules at the foundation of the EU economic governance and fiscal framework were set in 1992 to foster economic stability and fiscal discipline. Three decades later, we know these rules have no scientific basis but limit spending on the transition.
They can also push governments into austerity measures, primarily impacting the most vulnerable social groups. Studies also indicate that austerity correlates positively with polarisation, distrust in governments and a rise in populism.
Another common assumption is that those rules protect the next generations from the huge debt we could create today by pouring money into societal and environmental priorities such as mitigation, education or health. Fortunately, this assumption does not withstand scrutiny either.
Yes, climate action costs money. However, well spent, climate finance delivers on the money invested way beyond standard economic logic, with overwhelming benefits to health, quality of life and ecosystem resilience.
Recent estimates suggest that failure to act beyond the loss of the habitable Earth could also cost the global economy close to $178 trillion by 2070. Many of those damages are already a reality, with extreme events like hurricanes in the US, European drought and floods in China causing billions in damages.
Even using standard economic logic, investing in a more resilient net-zero economy makes sense. And what about the value of preventing higher death rates, food scarcity, resource conflicts and mass climate migration?
Investing today means preventing the need to spend much more in the future. However, the current rules fail to reflect reality, creating barriers to necessary action.
As the EU economic governance undergoes a review focused on rule tweaks, a few concrete steps can be taken to create a stronger economic and fiscal foundation for financing the green and just transition even before we can adjust the big rules.
Towards an economy that makes sense
The Fiscal Matters coalition has published seven key demands for an economic and fiscal governance framework that is fit for the future, capable of helping drive the economy towards sustainability.
First and foremost, governments should start paying more attention to the quality of investments, shifting the focus from growth to resilience and harm prevention. Extending upon the general escape clause experience, we should exempt future-fit investments from arbitrary fiscal thresholds.
We also need to revise approaches to debt sustainability analysis, ensuring better consideration of climate risks. This should be paired with early identification of asymmetries between the economy and other spheres, greater accountability for meeting sustainability targets and enhanced transparency and monitoring of national fiscal plans by the Member States.
The climate crisis is a cross-border challenge and requires joint action. A permanent EU fiscal capacity could facilitate collective action to address these challenges and support those Member States with less financial capacity.
Any such changes need to be participatory and inclusive, ensuring that the transition accommodates for perspectives of various groups and benefits all European citizens beyond the privileged green sectors and regions. They also need to come up with progressive tax reforms such as environmental taxes and wealth tax, as well as innovative policies such as universal basic services, universal basic income or a job guarantee scheme.
None of those changes is too far-fetched to implement. They also come as part of the broader need to shift from an economic system focused on growth to one that prioritises achieving universal human well-being in line with the planetary boundaries.
The Beyond Growth conference to be held in the European Parliament this May suggests that EU policymakers are starting to take notice.
Katy Wiese, the Senior Policy Officer at the EEB, comments on the links between EU policymaking and our new economic reality:
Our institutions and governance have been designed for a world characterised by relative stability and progress, but they have not been designed to steer our society in times of rapid change, when widely held assumptions, such as the pursuit for growth, are turning against us.
We need EU policymakers to take bold and ambitious action that embraces the urgency and interplay of overlapping crises while ensuring a truly just and inclusive transition.
Embracing the unknown
Beyond concrete steps focused on ensuring a better future, some things will remain unknown. And that could be a key motivation to act now.
Our ambitious decarbonisation pursuits might soon face the resource constraints of a finite planet, leading to skyrocketing prices or a disrupted transition. Further, current calculations might not nearly match the losses and damages our children may bear in 20-30 years if we fail to act now.
As youth voices for much more ambitious environmental and social agendas are starting to be heard, we need to embrace the responsibility and act to provide them with a chance for a liveable planet, so the next generations can create the future they want.
Watch the recording of the second webinar from the “Fiscal Policies for a Sustainable Future” series, covering the basics of fiscal policy in a changing world or register for the next one.
