How to finance green investments? The role of public debt

Abstract

Economic costs are a central political obstacle to investing in climate change mitigation and adaptation measures. Several studies now demonstrate that as costs increase, voters are less likely to support green initiatives. In this paper we argue that opposition to government green investments is conditional on the method of financing. Notably, because public debt shifts the burden of investments into the future, it may face less public opposition than broad based taxes that require an immediate sacrifice. To test this proposition, we fielded a preregistered conjoint survey experiment on nationally representative samples in one highly indebted (Italy) and one fiscally sound country (The Netherlands). We find debt financing increases voter support for green financing by up to 10 percentage points relative to broad-based taxes. However, we find carbon taxes and wealth taxes are most preferred. These findings demonstrate that credit market tools, like green bonds and debt for climate swaps, are likely politically efficient and not just economically efficient. Where investments are already financed with debt, the findings suggest that political communication can limit a political backlash to green investments. Most importantly, the findings show that the political opposition to paying for green investments can be circumvented.