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Can Climate Investment be Financed by Debt?

More than half of EU countries had debt-to-GDP ratios above 60% at the end of 2022, and governments are facing contradictory demands to invest in emissions reductions and to lower their debt ratios. If the European Union is serious about fighting climate change, it cannot keep ignoring this policy dissonance.

PARIS – Climate ambitions are running into macroeconomic headwinds in the European Union and the United Kingdom.

Speaking in late May, French Minister of the Economy Bruno Le Maire adamantly rejected the idea that France’s transition to a net-zero economy should be financed by issuing more debt. Then, just days later, Rachel Reeves, the UK’s shadow chancellor, backtracked from an earlier campaign pledge to borrow £28 billion ($35 billion) per year to finance climate investments. She now promises that, if elected, a Labour government would be fiscally “responsible,” increasing the country’s green investments only gradually. And in Germany, a draft law promoted by Vice Chancellor Robert Habeck of the Greens was watered down after Finance Minister Christian Lindner of the Free Democrats came out against a previously agreed ban on new gas boilers in homes.

It is no accident that climate commitments are beginning to feature prominently in the broader macroeconomic debate. Massive investments are needed to reduce greenhouse-gas emissions – to the tune of 2% of GDP annually in countries that are serious about reaching climate neutrality by 2050 – and anywhere from one-third to one-half of the outlay (depending on the country) will need to be financed by public budgets.