Rising cost of capital due to more climate protection?!
The ECB's Research Bulletin No.86 shows once again how far economic theory can be from economic reality. In a short essay on the effect of a CO2 tax, the researcher argue as follows:
Climate damage is a form of market failure that can and must be remedied by the state. This is obviously true, since the consequences of climate change affect everyone, not just those who earn returns from climate pollution. The market failure can be corrected by a carbon tax. The amount of the carbon tax should correspond to the present value of the damage caused - so that the polluter, and not the general public, bears the costs of climate-damaging behavior. These costs are a direct burden on companies' profits and must be viewed from a macroeconomic perspective as a trade off for climate protection. During an economic downturn, however, the tax would act as a fire accelerator - which is why the case is made for a cyclical CO2 tax.
If there were no such annoying things as elections in this country, an optimal tax could theoretically be found and levied. However, parliamentarians are reluctant to be patronized by theoreticians in the legislative process, and economic expertise is rather unevenly distributed among the parties.
Back to the essay. A carbon tax and the accompanying climate protection would reduce the risk aversion of savers: because they would no longer be afraid of climate change, players would put less money aside. The decreasing volume of savings would subsequently increase the real equilibrium interest rate. Or to put it another way: Climate protection leads to an increasing cost of capital. This thesis is open to criticism in many respects.
First, do you know anyone who saves because they are afraid that somehow, someday, they will suffer some unknown amount of damage from climate change? Do you know anyone who would buy a couch today if it were not for this threatening climate change?
Second, as long as the ECB leaves the deposit rate at -0.5%nand pushes investment grade bond yields around zero even in the long maturities through gigantic purchase programs, the risk aversion of savers will have no effect.
Third, the aging of Western society will inevitably lead to rising investment volumes in pension funds. This trend is being massively promoted by current political efforts (more company pension plans, more private pension plans and a funded pension pillar). In this context, slowing down climate change could even act as an amplifier: If no supply chains for pharmaceuticals are disrupted by catastrophes, if the agricultural economy is not disrupted by drought, if the power supply is not disrupted by storms, then, ceteris paribus, rising life expectancy will continue to increase and thus even more provision will be necessary.
A cyclical carbon tax is a nice idea, but it is unlikely to lead to higher interest rates.
