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Fiscal and Environmental Sustainability: Is Public Debt Environmentally Friendly?

Author

Listed:
  • Matilda Baret

    (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne)

  • Maxime Menuet

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, IPAG Business School)

Abstract

This article assesses the dilemma that most governments face when seeking to ensure the sustainability of their public finances through economic growth while simultaneously protecting the environment. We propose a growth model in which the government finances abatement-spending through taxation or public debt and which follows a fiscal rule that targets the long-run debt-to-GDP ratio. We show that there is a threshold for the debt ratio below which debt and environmental sustainability are secured. In steady state, the debt ratio exerts a nonlinear effect on environmental quality in the form of an inverted U-shaped curve, and the environmental tax is good for the environment when public debt is not. A fiscal rule authorizing a small but strictly positive debt ratio could help the government to implement adaptation policies for environmental protection while supporting long-run economic growth.

Suggested Citation

  • Matilda Baret & Maxime Menuet, 2024. "Fiscal and Environmental Sustainability: Is Public Debt Environmentally Friendly?," Post-Print hal-04802113, HAL.
    • Handle: RePEc:hal:journl:hal-04802113
    DOI: 10.1007/s10640-024-00847-0
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    Cited by:

    1. Marion Davin & Mouez Fodha & Thomas Seegmuller, 2024. "Pollution, public debt, and growth: The question of sustainability," Working Papers hal-04620026, HAL.
    2. Kushawaha, Deepak & Jain, Manisha, 2025. "Understanding the dynamics of public debt on renewable energy investment in developing countries," Energy Economics, Elsevier, vol. 147(C).

    More about this item

    JEL classification:

    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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