Green Fiscal Rules? Challenges and Policy Alternatives

By Francesca Caselli, Andresa Lagerborg, Paulo A Medas

June 21, 2024

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Francesca Caselli, Andresa Lagerborg, and Paulo A Medas. Green Fiscal Rules? Challenges and Policy Alternatives, (USA: International Monetary Fund, 2024) accessed November 21, 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

This paper studies the impact of green fiscal rules – designed to protect climate-related spending –on debt dynamics. Simulations of green rules that exempt green spending from the rule limits for an emergingmarket economy illustrate that they can lead to unsustainable debt dynamics when the net zero emissions goal is pursued mostly using spending-based instruments (e.g., investment and subsidies). Or the rule would need to implicitly assume a large fiscal adjustment in the non-green budget, which would undermine its credibility. It will be needed to build broad public consensus for a more comprehensive fiscal strategy that tackles the difficult policy tradeoffs that will be required and takes into account long-term effects. A more appropriate mix of climate policies, including actively employing carbon pricing, should be pursued within the overall setting of fiscal and debt objectives. Developing ‘green’ medium-term fiscal frameworks would help to integrate climate change considerations into fiscal policy design in a more comprehensive manner.

Subject: Climate change, Climate policy, Debt sustainability, Environment, External debt, Fiscal policy, Fiscal rules, Natural disasters

Keywords: Climate change, Climate policy, Debt objective, Debt sustainability, Fiscal rule, Fiscal rules, Global, Golden rule, Green spending, Medium-term fiscal framework, MTFF, Natural disasters, PFM practice, Policy alternative, Policy tradeoff

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/125
Stock No:

WPIEA2024125
ISBN:

9798400280726
ISSN:

1018-5941

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