Most scholars agree that debates on how to finance the Green Transition have not yet yielded definitive answers. We use the framework of ‘monetary architecture’ to analyze the Eurozone monetary and financial system as a constantly evolving hierarchical web of interlocking balance sheets. We frame the Green Transition as a challenge to provide large-scale financing by expanding the balance sheets and creating new credit money that can be used for investments in capital stock. This has a systemic dimension as the entire monetary architecture must be mobilized, and a procedural dimension as it also affects long-term funding and final repayment. The established approaches of the market-failure paradigm, which calls for a Pigou tax, and the ‘triad’ framework of taxation, treasury borrowing, and central bank money creation seem insufficient to provide the apparent financing need. We explore how financing the Green Transition in the European monetary architecture translates at the balance sheet level, and outline a four-step plan for ensuring that a green initial expansion can be triggered at sufficient scale, that it can be funded over the long term by crowding in balance sheets able and willing to sustain the expansion of credit money in the system, that the system has sufficient firefighting mechanisms to safeguard against disorderly contraction, and that it can provide channels for a orderly contraction when the objective of financing the Green Transition is reached.
Presentations at the workshop “Off-Balance-Sheet Fiscal Agencies and the Role of the State in Financing the Green Transition” (09/2023) and the 35th Annual Conference of the European Association for Evolutionary Political Economy (EAEPE), University of Leeds (09/2023).