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Climate policy and optimal public debt

Author

Listed:
  • Maximilian Kellner

    (MCC Berlin
    TU Berlin)

  • Marco Runkel

    (TU Berlin
    CESifo
    NoCeT)

Abstract

Employing a two-period model with an environmental externality, this paper investigates the relation between emission taxation and the optimal level of public debt. The central insight is that the effect of emission taxation on optimal borrowing is ambiguous and may lead to lower or higher optimal debt. In the context of climate change, we even show that the counterintuitive result of a higher optimal debt level is likely in the short-run and possibly also in the long-run, a result that provides a novel rationale for public borrowing. Our basic arguments turn out to be robust against several generalization.

Suggested Citation

  • Maximilian Kellner & Marco Runkel, 2024. "Climate policy and optimal public debt," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1584-1610, December.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:6:d:10.1007_s10797-023-09814-9
    DOI: 10.1007/s10797-023-09814-9
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    More about this item

    Keywords

    Adaptation; Environmental externality; Public debt; Climate policy; Tax smoothing;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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