Funding the fight against climate change

Darmstadt economist Ulrich Klüh investigates one of the most important social debates of our time: How can we raise the billions needed to make Germany climate-neutral?

By Kilian Kirchgeßner, 03/01/2023
Illustrations by Jenny Adam

Ulrich Klüh's parents were taken aback when he told them about his plans to do a doctorate on financial crises. "They wanted to know:⁠ 'Why, as an economist, would you want to work on such a historical topic?'", says Klüh. "However, even then it was clear to me that financial crises were not a historical phenomenon but would continue to be a concern in the future." Nearly three decades have passed since his conversation with his parents, and while Professor Klüh recalls it as an amusing anecdote today, he probably would have preferred to be wrong. Now, as a professor at Darmstadt University of Applied Sciences (h_da), he deals with the interactions between economies and societies against the backdrop of a very different crisis, albeit one that he considers much more acute.

In his current research he focuses on the economic and social aspects of the current climate crisis. How can we raise the enormous funds we need to transition our societies to climate neutrality? And what role could wealth taxes play in all of this? These are two of the questions he tries to answer in his work, which includes participation in two research projects initiated by the Federal Ministry of Education and Research (Bundesministerium für Bildung und Forschung – BMBF) and the Hans Böckler Foundation.

In these projects, he also gets to draw on the experience of his colleagues at the Center for Sustainable Economic and Corporate Policy (SECP) at h_da's Department of Economics, which he serves as its spokesperson. SECP was founded five years ago and addresses very specific and practical issues, such as the question of how the logistics sector can be made sustainable, or how organisations need to be set up to help them operate sustainably. "Another part of our research addresses more fundamental questions such as the interactions between politics, business, and society," explains Professor Klüh: "This is the field that I work on with my team." In addition to economists, Professor Klüh's team includes experts from other disciplines in the social sciences and humanities. "We critically analyse questions related to sustainability transformation from a social science perspective and combine this with tangible topics such as financial market issues or monetary and fiscal policy matters," says Klüh, outlining his approach.

The triad of climate, finance, and society

The most recent project in which he deals with these questions is titled "Climate Finance Society", where he investigates the triad of climate, finance, and society in collaboration with experts from the Sozialwissenschaftliches Forschungsinstitut Göttingen (Social Research Institute Göttingen), the University of Osnabrück, and the University of Paderborn. The project is scheduled to run for three years and is funded by the BMBF as part of the "Climate Protection and Finance (KlimFi)" initiative under the "Research for Sustainability – FONA" strategy.

Together, the four teams explore possible answers in this deeply complex line of research. How can we ensure sufficient funds are raised to support climate policy? And will we manage to complete the transformation in the little time we have left? To answer these questions, Professor Klüh and his team first take a look at the different approaches to climate finance taken by central banks such as the Bundesbank or the European Central Bank, and financial institutions such as savings banks. These approaches are then compared to the strategies of other stakeholders, including small and medium-sized businesses, development banks such as KfW (Kreditanstalt für Wiederaufbau), as well as grassroots activists. It is astonishing how much the different approaches still tend to diverge: "Some say that climate policy should mainly be the funded by the private sector, others consider it a public-sector responsibility. For some, climate finance is more about transferring funds to the global South, while others think the funds should be used to support local economies; some call for regulation, others for subsidies," says Ulrich Klüh. He explains that it's vital to draw attention to the plurality of this field in order to avoid misunderstandings among stakeholders.

From flood control to plumbing fleets

"The funding challenge is incredibly complex. Some say that local and regional governments at municipal and state level should have priority, as they are responsible for implementing measures such as flood control. But private-sector stakeholders need money as well if they are to protect the climate: for example, crafts and trades businesses will need to assess and adapt their vehicle fleets," explains Ulrich Klüh. And, he adds, the field of investigation – which includes public and private stakeholders from local to global levels – is so vast that it can hardly be investigated in its entirety. Consequently, the teams involved in the current project each focus on specific aspects, examining how climate finance can be translated into action with a view to German society. "The idea is to analyse the interplay between all stakeholders of climate policy," says Professor Klüh: "from politics to public banks to small and medium-sized businesses." So where do small businesses think differently from banks, politicians, or even climate activists? And how can their respective approaches and rationales be reconciled? To achieve this, the "Climate Finance Society" project aims to create a dialogue between these different stakeholders, for example by organising joint workshops.

Ulrich Klüh believes that we need a shift in paradigm: "To this day, most financial experts think that climate protection is as simple as governments setting high charges on carbon emissions. Then, they believe, businesses would be forced to make investments, which in turn would be supported by governments providing funds through their development banks and the general financial market, and there you go. But in practice, it's not as simple as that." Long before his tenure at Darmstadt University of Applied Sciences, Professor Klüh had noticed how difficult it is for climate issues to gain a foothold in economic deliberations. During the 2008-2010 banking crisis, for example, he served as secretary general of the German Council of Economic Experts. "Back then, I realised how difficult it is to draw attention to the urgency of environmental issues in the face of pressing economic challenges. After all, many stakeholders still don’t feel the same sense of urgency to act on ecological issues as they do on economic concerns."

Five trillion euros needed in Germany alone

According to a study by management consultancy McKinsey, between nine and ten trillion euros will be needed globally each year to fund climate policy; KfW estimates that Germany will need five trillion euros by 2045. "What's most important, however, is not money, but for us to finally understand that the monumental challenge ahead of us can’t be overcome by resorting to established mechanisms alone," says Professor Klüh. "I am increasingly convinced that we need far more governance to support these processes – far more, actually, than I would have ever considered necessary from my perspective as an economist. But, in the short amount of time we have left, governments are the only stakeholders who can take the necessary decisions at the required scale." Professor Klüh’s current research project tries to answer what these decisions will be – ranging from the role of public banks to coordinating the different stakeholders in advisory boards and committees. Among other things, says Professor Klüh, this will require to take better account of the diversity of perspectives on climate finance: "In particular, we must abandon the belief that climate finance is essentially a topic to be left to the financial markets and their stakeholders, which is particularly prevalent among experts in the sustainable finance realm. Another equally important issue is public funding to support climate policy."

In a second project funded by the Hans Böckler Foundation, Professor Klüh explores a specific facet of this issue: wealth taxes and the role they can play in bringing about a socio-ecological transformation. "Wealth taxes have, notoriously, been touted a leftist project that research economists had better steer clear of," explains Professor Klüh: "But this ignores that they could help us achieve our environmental objectives if harnessed intelligently. Wealth taxes could play a much bigger role in this than they are given credit for.” For example, he says, taxing land ownership provides numerous levers for environmental governance: "Unfortunately, though, these were not even mentioned during the deliberations on the recent property tax reform". It is beyond his comprehension how this was at all possible, he says, given the extreme climate situation we are already facing today.

At least the topic of climate change has finally caught on among economists and business experts, and extensive research in this field is underway. Nevertheless, in Professor Klüh’s view, the situation still leaves much to be desired: ⁠"The debate still lacks consistency and determination."


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