Climate Week at Goethe University: A Price for CO2 and Sustainable Finance - Where Will the Journey Lead?

In a joint lecture during the climate week at Goethe University, Professor Volker Wieland, IMFS, and Professor Volker Brühl, CFS, presented how an appropriate climate policy could look like and which opportunities financial markets offer.

In order to reduce emissions in various sectors as soon as possible, climate policy should start where it is most likely to work smoothly, Wieland said. One of the fundamentals of the German Council of Economic Experts’ special report on climate policy was to reap the low-hanging fruit first. It is decisive to reflect the scarcity of the good via a price for CO2. Since Germany represents only a small part of carbon dioxide emissions worldwide, Germany may act as a model but not as a forerunner.

Therefore, the council advised the government to implement a comprehensive European emissions trading system, which should refer not only to the energy sector, the energy-intensive industry and the European air traffic but which should be extended to the transport and building sectors in all member states by 2030 at the latest. However, this is not sufficient to reach the climate goals of the Paris climate agreement, Wieland warned. “A globally coordinated approach is essential to save up emissions,” he said.

At the financial markets, climate issues are already in full swing. Green bonds have surged as an investment category. At the moment, the fundamentals are laid for green bonds reaching a higher volume, Brühl said. Financial products still lack a standardized EU taxonomy in order to define them as green and sustainable according to ecological and socially sustainable characteristics. In Brühl’s opinion, this is crucial in order to avoid misguidance e.g. when only a small part of a fund is actually green. Brühl argues that there are further obstacles for sustainable finance. “At the moment, ESG bonds don’t offer better financing conditions than conventional bonds that’s why many treasurers don’t take them into account”. Information regarding a company’s carbon footprint are not included in the sustainability report either. In Brühl’s opinion, this could be an opportunity for Frankfurt to establish a corresponding index.

Since more than 80 percent of all small and mid-size companies in Germany are financed by bank loans, so-called green loans where the credit margins depend on the ESG rating should not be ignored. However, this is only possible for companies with a high rating. On the other hand, Brühl does not support an obligation for issuing green bonds. “This is not possible in all economic sectors and would harbor the danger of greenwashing”.