Fiscal Policies for a Sustainable Recovery and a Green Transformation

This paper compares the effectiveness of different fiscal policy instruments, carbon pricing,fiscal incentives for private green investments, and public green investment, in supporting a green recovery that isalso fiscally sustainable. It argues that relying on carbon pricing or green investments is not sufficient to achievethe transition to a low-carbon economy in a timely and sustainable way. Carbon pricing alone would result in rapidand significant energy price increases that would be recessionary. Similarly, the level of public greeninvestment needed to reach the Paris goals without recourse to carbon pricing would be so great that it would endangerdebt sustainability. The conclusion from the simulations supports the view that a mix of supply side policies (carbonpricing) and demand-side interventions (deficit financed green public investment) is necessary to achieve the Parisgoals within the specified period and with a fiscally sustainable outcome. The paper also assesses the costsassociated with transitioning to a low carbon economy by geographic area. It finds that deficit financed public greeninvestment by high-emitting countries only (typically advanced and emerging economies), would have positive growthimpacts for those countries and enhance their fiscal sustainability, while also providing large positivespillovers to other countries, particularly to highly climate sensitive nations. In turn, the simulations showthat wherever fiscally feasible it is in the best interest of all countries to increase public investment in the green economy.