How fiscal policies affect energy systems: the importance of an ‘environmental social wage’

Abstract

We employ a regional computable general equilibrium model to measure the impact on CO2 emissions of a balanced-budget increase in public environmental expenditure. We identify conditions under which an economic stimulus accompanied by a reduction in emissions could occur. Our results suggest that this is conceivable if the population values the environmental amenity funded by the increase in public expenditure and if this is reflected in wage bargaining behaviour. Given increasing concerns over climate change, public spending on environmental improvement could attract support together with the establishment of an "environmental social wage", where workers accept a lower pay in return for that improvement.