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The German ministry of economic affairs (BMWi) has proposed a new “green investment fund”. In this thread, I provide an economic analysis of the proposal and conclude: It is a bad idea and no “quick fix” will make it a good idea!
The fund will be a public foundation that grants 0% interest rate loans for green projects or green companies. Its equity capital comes from the federal government. In addition, the foundation can issue climate bonds at an interest rate that is fixed by the government at 2%.
The absurdity of promising bond buyers a guaranteed 2% interest when the German government can borrow at negative rates has already been discussed extensively on twitter – see @Isabel_Schnabel @jsuedekum @D_Langenmayr @christianbaye13
With respect to the 2%-promise, I’d only like to add one general point. A government promise to pay a higher than market interest rate is, in a certain sense, similar to a government promise to bound rents from above: In both cases it’s a subsidy for the well-off
Of course, you can try to minimize the unwanted distributional consequences of a lending rate higher than the market rate by introducing a quantity constraints, but then you get rationing and a flourishing black market – the informed well-off gain and everybody else pays.
In this thread, I want to move beyond the finance gimmick and ask the question: Why should we expect the proposed new investment fund to improve the capital allocation? What can the new fund do better than existing instruments available to the government?
To answer this question, I will compare/benchmark the proposed fund to the KfW. The KfW has a long tradition and a lot of experiencing in financing communal infrastructure projects including green infrastructure projects (and even has a “venture capital program”).
Clearly, it will take time to set-up and staff the new investment fund. So, if the goals is to move forward the green investment agenda as quickly as possible, the KfW wins easily.
If it isn’t speed, perhaps it is volume? No, since we can always leverage federal funds within the KfW-framework: Create a new lending program, provide additional equity capital and let KfW enhance debt financing (issuing of green bonds) accordingly.
If it is neither speed nor volume, perhaps it’s efficiency of capital allocation? This is very unlikely by any traditional measure since the KfW has a lot of experts with a proven track record -- here I see little hope the new fund can beat the KfW in an "efficiency race".
However, I believe that the creators of this idea had efficiency gains in mind when they suggest that "the public foundation will be less restricted by regulation than existing public funds”. This is where I start getting very nervous, and so should everone else.
To sum up, the proposed “green public fund/foundation” is a very costly, clumsy and inefficient public investment tool that helps the well-off. Let’s hope the coalition government will have the wisdom not to make this proposal part of the Green investment package on September 20.
