The ‘F-word’ threatening net zero

It’s not what you think

Recently, this blog looked at the wave of farmer protests across Europe. In many cases, one of the key demands is for less stringent environmental rules. Whether it’s limiting the use of pesticides, stricter water conservation or preventing land degradation, European farmers have been viscerally opposed to measures that are designed to help the environment but which would impinge on their ability to maximise short-term profits.

It's a fight where they’ve had plenty of success too, as policymakers have stepped back from implementing these new regulations or have heavily watered them down.

Yet for all the attention this political tussle is drawing from every corner of the media, the big ‘f-word’ that threatens to derail progress on the transition to net zero is not ‘farmers’ but ‘fiscal rules’.

Granted, that’s technically two words, but the point remains. In some of Europe’s biggest economies, we’ve seen in just the last few months how the overriding priority fiscal rectitude is hindering progress in financing the climate transition.

Doubtless one of the most extreme examples is Germany. Here, the country in question is so committed to austerity politics that they wrote it into their constitution, limiting the national deficit to 0.35% of GDP. Faced with the impossibility of actually running a country with this kind of rule, politicians in Berlin have increasingly resorted to workarounds, using off-budget special funds. That strategy was going to be applied for a raft of climate spending, until the Constitutional Court ruled that money couldn’t be repurposed from one fund to another. In the end, the whole budget had to be reworked and just under €60bn of climate funding was cut for 2024-27.

In the UK, we’ve seen how Labour agonised for weeks over the question of whether to stick to their commitment to ramp up total climate investment to £28bn per year by 2029 (compared to current policies of around £10bn). In the end, the concern that they would be seen as breaking the informal but bipartisan fiscal rules around cutting the debt and deficit prevailed. The new investment goal is much less ambitious, standing at around £15bn.

Most recently, in France the government has chosen to revise some its climate funding plans in light of projections for weaker growth and hence higher than expected deficits and debt. To stay in line with EU debt rules, the French government sought €10bn in budget cuts. €1.4bn is coming out of policies to fight climate change, the vast majority taking the form of a sizeable cut to France’s flagship fund for home renovations.

Once could be considered bad luck. Twice an unfortunate coincidence. Three times looks like a trend.

There are likely two main conclusions that flow from these cases. The first is that the mainstream European approach to debt and government finances is at odds with the pressing need for massive investment imposed on us by the fight against climate change. The second is that, when in search of savings, governments are all too willing to sacrifice vital climate spending.

Naturally this does not mean that a proper management of public finances is an irrelevance, a bygone relic to be tossed aside. In some cases, like Germany, there is a genuine problem with how tight the rules are, but in general fiscal rules employed in Europe have some merit and the need to prevent excessive debt piling up is genuine. The call to simply ignore this is not a satisfying answer.

Yet the status quo is not satisfactory either. When world leaders gathered in Paris to set the worldwide response to climate change, they committed to preventing global temperatures from rising higher than 1.5°C above the pre-industrial baseline. Today many scientists argue that this target will be missed without truly extraordinary measures. Even the less ambitious target to keep warming below 2°C would not be feasible with current policies. We are therefore faced with an urgent need to do more and do it faster if we are to save our planet from catastrophic climate change. Fiscal rules that lead to cuts in climate investment are obviously counter-productive to this goal.

So it appears as if two of the biggest challenges for European governments today are in conflict. Can they be reconciled?

Assuming that a miraculous recovery doesn’t rescue use from this dilemma by growing out of debt and creating the space for public spending, there is still potential to improve our approach.

In particular, we should think about how to address the information gap in the public debate.

A recent report from think tank I4CE noted the €406bn annual deficit in EU climate spending – the gap between how much investment there is and how much is needed to meet EU climate targets. This is precisely the sort of information we need in our national conversations to properly assess what our governments are doing.

In a similar manner to how the Office of Budget Responsibility analyses budgets and compares them to the fiscal rules, an ‘office of carbon responsibility’ could determine how much money is going towards climate change and compare it with what we need to be spending to hit our climate targets (our ‘carbon rules’).

The more granular this information can be, the better. If the assessment can be broken down by sector then we would be able to pick out which parts of our economy are in particular need of extra climate spending and which are doing fine. Moreover, when set up against the level of private sector activity and how profitable it is to operate without public support, we may find that some areas are relatively over-supported and surpluses could be reallocated to those sectors where the deficits are largest. This more refined approach could then allow us to be more effective on climate change without entirely abandoning fiscal rules.

This change alone would not be enough and we can’t assume that it would always work out so neatly. Sometimes it would still come down to a political choice of adding more debt or falling further from our climate goals. But to make this carbon assessment a regular part of our national budget process would help inform the public and add much needed transparency, a necessary pre-condition for a form of politics that acts in the interest of the long-term and won’t keep kicking the can every five years.