Public Debt Dynamics During the Climate Transition

By Daniel Garcia-Macia, Waikei R Lam, Anh D. M. Nguyen

March 29, 2024

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Daniel Garcia-Macia, Waikei R Lam, and Anh D. M. Nguyen Public Debt Dynamics During the Climate Transition, (USA: International Monetary Fund, 2024) accessed November 13, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Managing the climate transition presents policymakers with a tradeoff between achieving climate goals, fiscal sustainability, and political feasibility, which calls for a fiscal balancing act with the right mix of policies. This paper develops a tractable dynamic general equilibrium model to quantify the fiscal impacts of various climate policy packages aimed at reaching net zero emissions by mid-century. Our simulations show that relying primarily on spending measures to deliver on climate ambitions will be costly, possibly raising debt by 45-50 percent of GDP by 2050. However, a balanced mix of carbon-pricing and spending-based policies can deliver on net zero with a much smaller fiscal cost, limiting the increase in public debt to 10-15 percent of GDP by 2050. Carbon pricing is central not only as an effective tool for emissions reduction but also as a revenue source. Delaying carbon pricing action could increase costs, especially if less effective measures are scaled up to meet climate targets. Technology spillovers can reduce the costs but bottlenecks in green investment could unwind the gains and slow the transition.

Subject: Climate finance, Climate policy, Emerging and frontier financial markets, Environment, Financial markets, Public debt

Keywords: Adjustment cost parameter, Carbon pricing, Climate change, Climate finance, Climate policy, Dynamic general equilibrium., Emerging and frontier financial markets, Global, Industrial policies, Investment bottleneck, Mitigation, Mix of carbon-pricing, No. 2024/71, Public debt, Public investment, Subsidies, Technology spillover

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/071
Stock No:

WPIEA2024071
ISBN:

9798400270635
ISSN:

1018-5941

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