Germany´s constitutional court: Reincarnation under the climate veil of ignorance

The fiscal burdens from Germany’s ambitious climate policies pile up only after 2030. In recognizing this, and labelling the 2019 climate protection law as partly unconstitutional as a result, Germany's Constitutional Court attempts to hardwire future generations’ interests into the political process. This could spark a tectonic shift for future climate action. Using calculations for a representative archetype in projections that match the scenarios provided by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), we found that increasing ambitions from the current 2°C trajectory to a 1.5°C trajectory doesn’t have large effects on carbon and average electricity prices up to 2030 . This is due to strongly declining global investment costs in a coordinated 1.5°C scenario for the typical renewables, resulting from cost reductions through economies of scale. The large cost burden materializes between 2030-2050 as the more ambitious scenario requires a much larger employment of photovoltaic capacity in combination with earlier and larger hydrogen capacities, as well as a stronger deployment of carbon capture and storage. The constitutional court explicitly addresses the issue of how the financial burden should be shouldered by different generations.

Essential for the redistribution is the question of whether the current generation has the right to destroy the environment. In this case, future generations would have to compensate them in order for today’s generation to not destroy their future livelihood. Alternatively, if future generations have the right to demand the protection of their livelihoods, the current generation has to compensate them for polluting the environment today. The current political praxis is oriented around the former while the constitutional court ruling could be interpreted in the way that favors the latter interpretation.

What if you were a fish in the future? That is, according to the constitutional court, bad luck for you. It points out that the right to a constitutional complaint is exclusive to natural (human) persons, even if they are children from Nepal or Bangladesh. On the other hand, such complaints by NGOs as “advocates for nature” are not admissible. Moreover, the court’s ruling highlights our societies’ shortcomings in dealing with long-term issues such as climate change, described by former Bank of England governor Mark Carney as “the tragedy of the horizon”. Part of the tragedy can easily be demonstrated with a simply numerical example. Imagine a policy that – given a cost for current generations – increases the wellbeing of all future generations. Let the benefit be an improvement in the form of an annual USD100 cash flow that starts in 100 years and runs to infinity. The calculated net present value (NPV) of that cash flow is the maximum cost financial markets would be willing to spend today to realize that future cash flow. Unfortunately, the NPV is largely dependent on your required rate of return. For the numerical example, let us just compare the rate of return applied in US climate policy. While the Trump administration raised the rate from 3% to 8% for the calculation of the social cost of carbon, a prominent group of advocates urges the Biden administration to reduce this rate to 1%. At 1%, this future cash flow has a NPV of around USD3,700 while at 8% it is just worth 57 cents. Consequently, under a required rate of return of 1%, a policy actor would be willing to spend USD3,700 today to realize this cash flow for future generations. Under 8%, the required rate of return for the future is basically worthless, an assessment the affected future generations themselves will hardly agree on. 



Contact

Markus Zimmer
Allianz SE