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Fiscal consolidation and climate policy: An overlapping generations perspective


  • Rausch, Sebastian


This paper examines the distributional and efficiency impacts of public debt consolidation financed through a carbon tax employing a dynamic general-equilibrium model with overlapping generations of the U.S. economy. The numerical model features government taxes and spending and a multi-sectoral production structure including intermediate production, specific detail on the energy sector both in terms of primary energy carriers and energy-intensive industries, and sector- and fuel-specific carbon inputs. In contrast to revenue-neutral carbon tax swaps, using the carbon revenue for deficit reduction implies a relaxation of future public budgets as debt repayment results in lower future interest obligations. While intergenerational welfare impacts depend importantly on what tax recycling instrument is used, we find that combining public debt consolidation with a carbon policy entails the possibility of sustained welfare gains for future generations. If social discount rates are sufficiently low or if social preferences exhibit a large aversion with respect to intergenerational inequality, combining fiscal consolidation and climate policy may offer the chance for societal gains even without considering potential benefits from averted climate change.

Suggested Citation

  • Rausch, Sebastian, 2013. "Fiscal consolidation and climate policy: An overlapping generations perspective," Energy Economics, Elsevier, vol. 40(S1), pages 134-148.
  • Handle: RePEc:eee:eneeco:v:40:y:2013:i:s1:p:s134-s148 DOI: 10.1016/j.eneco.2013.09.009

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    References listed on IDEAS

    1. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
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    5. Rasmussen, Tobias N. & Rutherford, Thomas F., 2004. "Modeling overlapping generations in a complementarity format," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1383-1409, April.
    6. Jensen, Svend E Hougaard & Rutherford, Thomas F, 2002. " Distributional Effects of Fiscal Consolidation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 471-493, September.
    7. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    8. Rutherford, Thomas F., 1995. "Extension of GAMS for complementarity problems arising in applied economic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1299-1324, November.
    9. Lau, Morten I. & Pahlke, Andreas & Rutherford, Thomas F., 2002. "Approximating infinite-horizon models in a complementarity format: A primer in dynamic general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 577-609, April.
    10. Babiker, Mustafa H. & Metcalf, Gilbert E. & Reilly, John, 2003. "Tax distortions and global climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 269-287, September.
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    Cited by:

    1. Pereira, Alfredo & Pereira, Rui, 2016. "On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions," MPRA Paper 77630, University Library of Munich, Germany.
    2. Gonand, Frédéric & Jouvet, Pierre-André, 2015. "The “second dividend” and the demographic structure," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 71-97.
    3. repec:kap:enreec:v:67:y:2017:i:2:d:10.1007_s10640-015-9984-z is not listed on IDEAS
    4. Mouez Fodha & Thomas Seegmuller & Hiroaki Yamagami, 2014. "Environmental Policies under Debt Constraint," AMSE Working Papers 1431, Aix-Marseille School of Economics, Marseille, France, revised Jun 2014.
    5. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association, vol. 68(1), pages 195-214, March.
    6. Anna Grodecka & Karlygash Kuralbayeva, 2014. "The Price vs Quantity Debate: Climate policy and the role of business cycles," OxCarre Working Papers 137, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    7. Jan Siegmeier & Linus Mattauch & Max Franks & David Klenert & Anselm Schultes & Ottmar Edenhofer, 2015. "A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare," Working Papers 2015.31, Fondazione Eni Enrico Mattei.
    8. Rausch, Sebastian & Abrell, Jan, 2014. "Optimal Dynamic Carbon Taxation in a Life-Cycle Model with Distortionary Fiscal Policy," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100513, Verein für Socialpolitik / German Economic Association.
    9. Wang, Qian & Hubacek, Klaus & Feng, Kuishuang & Wei, Yi-Ming & Liang, Qiao-Mei, 2016. "Distributional effects of carbon taxation," Applied Energy, Elsevier, vol. 184(C), pages 1123-1131.
    10. Gabriel Bachner & Birgit Bednar-Friedl, 2016. "Counterbalancing the Effects of Climate Change Adaptation on Public Budgets: Factor Taxes, Transfers, or Foreign Lending?," Graz Economics Papers 2016-07, University of Graz, Department of Economics.
    11. Marian Zaharia & Aurelia Pătrașcu & Manuela Rodica Gogonea & Ana Tănăsescu & Constanța Popescu, 2017. "A Cluster Design on the Influence of Energy Taxation in Shaping the New EU-28 Economic Paradigm," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-21, February.
    12. Eduardo L. Giménez & Miguel Rodríguez, 2016. "Optimality of relaxing revenue-neutral restrictions in green tax reforms," Working Papers. Collection A: Public economics, governance and decentralization 1605, Universidade de Vigo, GEN - Governance and Economics research Network.

    More about this item


    Climate policy; Fiscal policy; Deficit reduction; Carbon tax; Overlapping generations;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming


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