Sustainable finance is often discussed as a solution to the climate crisis, but its impacts are limited. We introduce the concept of “public sustainable finance,” in which the state has a central role to play for maximum transformational impact. To date, sustainable finance focuses on mobilizing private capital by “de-risking” private investments through public funds without considering direct government action. This is due to an implicit reference to mainstream economic theory: according to the New Consensus model, an overly active state leads to time inconsistency problems and crowding-out effects. The theoretical assumptions are also reflected in the current institutional framework in the form of the EU’s Maastricht Treaty and national debt brakes. However, these assumptions based on the loanable funds theory have been sufficiently refuted in recent years. Loans arise out of thin air and can provide additional public investments, which in turn lead to increased private investment (crowding in). Using the case of Germany, we show how public sustainable finance can be introduced despite tight fiscal regimes. We propose that the Klima- und Transformationsfonds (KTF) be given its own borrowing powers. By borrowing 162 billion euros by 2030, the existing financing gap can be closed and important investments in the future can be made.
Co-authors:
Philipp Golka, Max Planck Institute for the Study of Societies
Jan-Erik Thie, Global Climate Forum
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