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Climate Policy and Optimal Public Debt

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  • Maximilian Kellner
  • Marco Runkel

Abstract

This paper analyzes the optimal level of public debt when taxes are used not only for funding public expenditures but also for correcting externalities from climate change. Taking into account externalities implies that the optimal policy deviates from tax smoothing. Provided cumulative marginal damages are larger from today’s than from tomorrow’s emissions, the internalization of externalities decreases [increases] optimal debt if tax rates are on the increasing [decreasing] side of the Laffer curve. The reversed holds if the cumulative marginal damages increase over time. Allowing for endogenous adaptation investments reduces the deviation from tax-smoothing, but nevertheless increases optimal debt.

Suggested Citation

  • Maximilian Kellner & Marco Runkel, 2021. "Climate Policy and Optimal Public Debt," CESifo Working Paper Series 8865, CESifo.
    • Handle: RePEc:ces:ceswps:_8865
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    Citations

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    Cited by:

    1. Kellner, Maximilian, 2020. "Environmental Pollution & the Political Economy of Public Debt," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224561, Verein für Socialpolitik / German Economic Association.
    2. Stavros A. Zenios, 2022. "The risks from climate change to sovereign debt," Climatic Change, Springer, vol. 172(3), pages 1-19, June.
    3. Maximilian Kellner, 2023. "Strategic effects of stock pollution: the positive theory of fiscal deficits revisited," Public Choice, Springer, vol. 194(1), pages 157-179, January.

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    More about this item

    Keywords

    environmental externality; public debt; 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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