A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare

Abstract

Climate change economics mostly neglects sizeable interactions of carbon pricing with other fiscal policy instruments. Conversely, public finance typically overlooks the effects of future decarbonization efforts when devising instruments for the major goals of fiscal policy. We argue that such a compartmentalisation is undesirable: policy design taking into account such interdependencies may enhance welfare and change the distribution of mitigation costs within and across generations. This claim is substantiated by analyzing six interactions between climate policy and public finance that are insufficiently explored in current research: (i) reduced tax competition in an open economy, (ii) portfolio effects induced through climate policy, (iii) restructuring public spending, (iv) revenue recycling for productive public investment, (v) greater intragenerational equity through appropriate revenue recycling and (vi) intergenerational Pareto-improvements through intertemporal transfers. We thereby structure the hitherto identified interactions between climate change mitigation and public finance and show that jointly considering carbon pricing and fiscal policy is legitimate and mandatory for sound policy appraisal.JEL classification: B41, H21, H23, H54, H60, Q54

Fiscal Policies for Development and Climate Action

“…For developing countries, which tend to have lower levels of DRM, funding public investments and services through environmental taxation may or may not be desirable (Siegmeier et al 2015). Environmental taxes are less distortionary to collect than other taxes and, as this chapter will argue, can help countries reap substantial, direct development co-benefits.…”

“…In this example of "double market failure" (pollution oversupply and innovation undersupply), taxation may be complemented by more targeted measures such as investment rebates that encourage the development or diffusion of energy efficiency innovations (OECD 2010b; ). In addition, governments can make complementary adjustments in public spending, such as increased investments in energy infrastructure (Siegmeier et al 2015).…”

Do Firms That Are Disadvantaged by Unilateral Climate Policy Receive Compensation? Evidence from China’s Energy-Saving Quota Policy

“…The ESQP is a "command-and-control" regulation in China aiming to address the market failures (negative externalities) associated with carbon emissions. However, resistance to this regulation emerged as soon as the ESQP was implemented in 2012, in part because the policy would potentially be sensitive to free-riding [45]. Enterprises mainly complete energy-saving tasks or environmental responsibilities by purchasing or improving environmental protection equipment and production equipment, and improving production processes, and optimizing product design.…”

Climate Policy Enhances Efficiency: A Macroeconomic Portfolio Effect

“…As a binding and sufficiently ambitious international agreement seems currently unlikely, independent national efforts come into focus -and with them, the effects of climate change and climate policy on national economies that may motivate such efforts(Edenhofer et al, 2014;Siegmeier et al, 2014).1 INTRODUCTION…”