Increasing Resilience: Fiscal Policy for Climate Adaptation

Abstract

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Financing Low-Carbon Transitions through Carbon Pricing and Green Bonds

“…Often these instruments are perceived as alternative choices, but this paper finds there are important gains from deploying them jointly, provided countries have sufficient fiscal space. Debt levels are rising in many low-income countries (Essl et al 2019), and in such circum-stances it is preferable for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al 2019). However, for advanced economies, Blanchard (2019) observes that sovereign debt, in contrast to corporate debt, is not rising that much, so there may be space for pursuing climate policies by green bonds and carbon pricing.…”

“…Notwithstanding these potential benefits, the use of green bonds can be problematic in countries with existing high public or private debt. Debt levels are rising in many low-income countries (Essl et al 2019), and in such circumstances it is optimal for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al 2019). However, the greatest mitigation effort should be borne by the largest carbon emitters, which are mostly high and middle-income countries that have already issued green bonds.…”

“…14 Scenario 1 presents business-as-usual (BAU). 15 In this case, no attempt is made toward mitigation, and 14 In our modeling procedure, we pursue simplified versions. We want to elaborate on transparent and simple scenarios and policy options, and thus we will abstain from detailed functional specifications and calibrations, as, for example, undertaken in the Nordhaus DICE model.…”

Practical Vitality of Green Bonds and Economic Benefits

“…Debt levels are rising in many low-income countries (Essl et al, 2019). In such circumstances, climate policy should be financed by taxation or budget reallocation instead of deficit spending (Forni et al, 2019). Heine et al (2019) observed that Carbon Pricing improves the performance of green bonds, which in turn improve inter-generational equity, political feasibility, and help address multiple market failures with speeding up the transitions.…”

With a Little Help from My Friends: Debt Renegotiation and Climate Change

“…However, these efforts will help to prevent negative impacts on economic activity (CAT, 2020), leading to a faster GDP growth and a lower medium and long-run debt-to-GDP ratio as compared to a situation without preemptive adaptation (Forni, Catalano, & Pezzolla, 2020). Overall, delayed action will result in a combination of reduced public revenues, due to productivity and foreign market losses, and the higher need for public spending, to compensate for the damages of the transition and physical risks, will put future public finances and repayment capacity under severe strain in the medium and long run.…”