"Never has the debt brake been more important", commented Federal Finance Minister Christian Lindner on the presentation of the budget draft for 2023. Even before the recent ruling of the Federal Constitutional Court, this statement and the associated restrictive fiscal policy were criticized by many. Lindner's conclusion seems out of touch in the face of the enormous transformation tasks that Germany and the world as a whole are facing. The climate crisis, the "Zeitenwende," and other social, ecological, and economic challenges require immense investments. Insisting on the debt brake not only prevents meaningful and necessary investments but also jeopardizes social peace and strengthens both right and left extremes (see Gabriel et al. 2022). It is also argued in many cases that the restrictive fiscal policy is partly responsible for the predicted decline in Germany's gross domestic product in 2023 (see Fratzscher 2023).

This text aims to contribute to this debate by highlighting, with the concept of "climate debts," that a rigid focus on the debt brake falls significantly short. Subsequently, the narrow view of GDP on the development of welfare and its limited suitability as a central societal indicator is addressed, and the National Welfare Index (NWI) is introduced as an alternative indicator.

Climate debts – an indeterminate term

Currently, there is no universally accepted definition and methodology for the term "climate debts." Sometimes, climate debts are expressed solely in physical units, such as tons of CO2 equivalents (CO2e), but sometimes they are also expressed in monetary units through cost rates. The basic idea behind this approach is the connection that the major emitters of greenhouse gas emissions (GHG) are not the ones who will suffer the most from the consequences of climate change. Questions of climate justice are thus addressed (see Warlenius 2018).

Economists Andrew Fanning and Jason Hickel recently concluded that industrialized countries have exceeded their share of the available CO2 budget (equally distributed per capita; "fair share") by about 2.5 times (Fanning/Hickel 2023). In contrast, India has used about a quarter of its CO2 budget, and many Global South countries still have a larger portion available. Industrialized countries have already significantly indebted themselves to other countries concerning the Earth's CO2 sink function. This indebtedness is expected to increase substantially in the coming years.

To convert climate debts into monetary amounts and concrete claims, Fanning and Hickel use avoidance cost rates published by the IPCC in its latest assessment report. These rates increase from $135 (2010 prices) per ton of CO2 in 2025 to $547 per ton in 2050 (Byers et al. 2022). The calculation does not assess the actual climate damages but rather the costs incurred by avoiding GHG emissions.

Based on these assumptions until 2050, Fanning and Hickel's approach calculates that industrialized countries would have to pay a total of $170 trillion (2010 prices) in compensation to other countries, especially from the Global South, for overusing the Earth's sink functions. The USA would have to pay approximately $80 trillion, with India benefiting the most, receiving $57 trillion. Germany would have to pay around $12 trillion by 2050. Annually, this would amount to approximately $400 billion. It's crucial to note that Fanning and Hickel's approach calculates "only" the avoidance costs and not the actual damages of a 1.5°C warming, which would significantly increase with each additional tenth of a degree.

Alternatively, climate debts can also be calculated using damage cost rates. For this contribution, calculations were performed for Germany for the period 1991 to 2022 by multiplying the GHG emissions at the time of their emission by an increasing damage cost rate per ton of CO2e over time. The emission data comes from the reporting of the German Environment Agency, and the damage cost rates are based on the recommendations of Method Convention 3.1 for the determination of environmental costs, also published by the German Environment Agency (Matthey/Bünger 2020).

Using the recommendations and data of the FUND 3.0 model, damage cost rates are applied, increasing from €133 per ton of CO2e in 1991 to €188 per ton of CO2e in 2022. Additionally, the German Environment Agency recommends performing scenario calculations with an alternative, significantly higher cost rate. In this case, a 0% time preference rate is used instead of a 1% rate. A positive time preference rate expresses that the welfare of current generations is weighted higher than the welfare of future generations. If current and future welfare or welfare reductions are to be valued equally, a 0% time preference rate is chosen. For 2022, a damage cost rate of €663 per ton of CO2e would be applied, approximately 3.5 times higher.

Depending on the damage cost rate used, the climate debts accumulated by Germany since 1991 differ by a factor of about 3.5. Even when using the "lower" damage cost rate, extremely relevant magnitudes emerge: Aggregating the damages caused from 1991 to 2022, Germany's current climate debt amounts to nearly €5 trillion (2015 prices). This is more than twice the current indebtedness of the overall public budget (€2.3 trillion). Currently, the public budget's debt-to-GDP ratio is 73%, while the calculated "climate debt ratio" is about 150% of GDP (see Figure 1, left).

Using the higher damage cost rate (0% time preference rate), climate debts would be around €18 trillion, approximately 5.5 times Germany's current GDP – a climate debt ratio of 550%. When considering not the accumulated debt but the new debt, the newly "incurred" climate debts of €151 billion are about 3 times higher than the new debt of the overall budget (see Figure 1, right). Using the higher damage cost rate, these amount to €534 billion, about 11 times higher.

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An expanded view of societal welfare

Which variant of climate damage calculation is the "correct" one cannot be answered universally. This depends on the perspective and the question asked. There are also considerable uncertainties regarding the determination of both avoidance and damage cost rates, and thus, regarding the exact amount of climate debts. Therefore, calculations were performed with both a lower and a higher damage cost rate.

The extent of all presented approaches to calculate climate debts makes it clear that a focus solely on the indebtedness of public budgets falls short, as crucial connections are overlooked. Regarding potential political conclusions, it is crucial to recognize that by focusing on public debt and the debt brake, it is overlooked that financing climate protection measures (additional to existing efforts) could reduce future climate debts. Firstly, because less CO2 would be emitted. Secondly, because the already emitted CO2 would have less severe impacts. This reinforces the argument that a narrow focus on the debt brake can block meaningful investments.

Climate debts are just one example of costs not considered in the GDP. The same applies to other environmental costs (e.g., water or air pollution) and costs (and benefits) in other areas, such as the negative consequences of child poverty (see DIW Econ 2023). An attempt to consider such additional ecological, social, and economic aspects in an integrated approach is made by the National Welfare Index (NWI). The methodology was developed by FEST on behalf of the Federal Ministry for the Environment and the German Environment Agency based on similar international alternative welfare measures and in cooperation with the Research Center for Environmental Policy at FU Berlin in 2009 and has been further developed several times since then. Further information on the NWI can be found, for example, in the "Environmental Data" of the German Environment Agency, the latest results report from the Institute for Macroeconomics and Economic Research (IMK), and, for those interested, in the method report (NWI 3.0).

Looking at the development of the NWI over the past thirty years, significant differences from GDP development are evident (see Figure 2):

In this way, the NWI opens up new perspectives regarding possible policy measures. Unlike GDP, the NWI directly shows positive effects of a socio-ecological transformation: for example, achieving the GHG reduction targets of the German government or reducing income inequality to the level of 1999. Scenario calculations of the NWI show that achieving these two goals – ceteris paribus – could increase welfare by more than 30 points by 2030 (see Figure 2).

The reduction of climate debts is thus considered a positive factor in the NWI. This allows inclusion in decision-making processes and communication of progress in these areas. The difference this can make is also illustrated in the current year: According to forecasts, GDP is expected to decrease by about half a percentage point in 2023. However, the NWI might increase due to the reduction of GHG emissions – AG Energiebilanzen estimates an 8% decrease for the first half of the year (AG Energiebilanzen 2023). Whether this will indeed be the case, or whether other factors such as income distribution will lead to different results, will be revealed in the next calculation of the NWI in summer/fall 2024.

The NWI is, of course, not a "cure-all." Due to its methodology (monetization) and data availability, it is subject to various restrictions and should therefore be used only as an informational tool among many. However, due to its integrated consideration of economic, ecological, and social aspects, it enables a more comprehensive view of societal welfare than GDP and could thus be a puzzle piece on the path to a successful socio-ecological transformation.

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Disclaimer: This article is a translated version of the intervention that was originally published in German language as part of the Economists For Future Debate Series in the online magazine Makronom. Hence, some of the linked references are in German. 

About the author:

Benjamin Held has been leading the Sustainable Development department at the Protestant Institute for Interdisciplinary Research (FEST) since 2020. Prior to that, he worked as a research assistant at FEST and the Institute for Industrial Ecology (INEC) at Hochschule Pforzheim, as well as a teaching assistant at the Universities of Heidelberg and Lüneburg. His main areas of focus include questions related to socially compatible climate policy, alternative welfare and sustainability indicators, as well as providing guidance in the development and implementation of climate protection concepts and measures.