Climate protection as a driver for investment
Good climate policy can contribute more to a stable, growing economy than previously thought. This is because carbon prices do more than just reducing greenhouse gas emissions. The declining return on fossil fuel assets due to carbon pricing leads to increased investment in equipment and machinery, infrastructure and innovation in other industries. According to researchers from the Mercator Research Institute on Global Commons and Climate Change (MCC), this not only averts damage from climate change but is also a key to lasting prosperity.
The corresponding study “Capital beats coal: how collecting the climate rent increases aggregate investment” has been published in the prestigious Journal of Environmental Economics and Management. The economists Jan Siegmeier, Linus Mattauch and Ottmar Edenhofer refute the popular stance that a rigorous environmental policy inevitably leads to “de-industrialization.” They provide a mathematical demonstration for the conjecture of economist Martin Feldstein that the taxation of economic rents increases capital accumulation. For this, the MCC researchers applied a standard model of economic growth theory to current climate policy.
“As a society, we would be well advised not to contrast climate protection with economic growth,” says Siegmeier. “Carbon prices indeed reduce the rents that can be generated from fossil fuels. However, they also contribute to shifting investments to machinery and new technologies in other industries, which then become more productive.” This applies to all sectors of the economy and not just renewable energy and improved resource efficiency. Overall, this has a positive macroeconomic effect: on the one hand, it does not reduce the existing physical supply of fossil fuels. On the other hand, consistent and reliable carbon prices prevent capital from being tied up in so-called “stranded assets,” meaning investments that are no longer profitable in the long term due to climate policy.
The new finding advances the debate on carbon pricing and broadens its scope: it is not just about designing climate policy in an efficient and just way, but takes into account the impact on assets and financial markets. The discussion about that aspect has thus far revolved primarily around the negative effects on fossils-related assets. Now, the focus is widened to the positive aspects of carbon pricing, such as the relative upward revaluation of other investment opportunities.
“We should reform emissions trading systems, such as the EU ETS in Europe, so that the revenues are used to relieve the tax burden on citizens or for public investments,” says MCC Director Edenhofer, who is also Chief Economist at the Potsdam Institute for Climate Impact Research (PIK). “We’re able to show that the auctioning alone creates additional economic growth.”
Reference of the cited article:
Siegmeier, J., L. Mattauch and O. Edenhofer (2018). Capital beats coal: how collecting the climate rent increases aggregate investment. Journal of Environmental Economics and Management | DOI: 10.1016/j.jeem.2017.12.006.