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Fiscal Policies for a Sustainable Recovery and a Green Transformation (English)

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 is also fiscally sustainable. It argues that relying on carbon pricing or green investments is not sufficient to achieve the transition to a low-carbon economy in a timely and sustainable way. Carbon pricing alone would result in rapid and significant energy price increases that would be recessionary. Similarly, the level of public green investment needed to reach the Paris goals without recourse to carbon pricing would be so great that it would endanger debt sustainability. The conclusion from the simulations supports the view that a mix of supply-side policies (carbon pricing) and demand-side interventions (deficit financed green public investment) is necessary to achieve the Paris goals within the specified period and with a fiscally sustainable outcome. The paper also assesses the costs associated with transitioning to a low-carbon economy by geographic area. It finds that deficit financed public green investment by high-emitting countries only (typically advanced and emerging economies), would have positive growth impacts for those countries and enhance their fiscal sustainability, while also providing large positive spillovers to other countries, particularly to highly climate sensitive nations. In turn, the simulations show that wherever fiscally feasible it is in the best interest of all countries to increase public investment in the green economy.


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    Catalano,Michele, Forni,Lorenzo

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    Policy Research Working Paper

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    The World Region,

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    Fiscal Policies for a Sustainable Recovery and a Green Transformation

  • Keywords

    green investment; increase in temperature; carbon pricing; carbon revenue; carbon tax; trade and investment; rate of return on capital; carbon price; effect of climate change; increase in energy price; impact of climate change; long-run debt; long-run growth; integrated assessment models; marginal productivity of capital; taxation on labor income; exposure to climate risks; evolution of climate change; carbon capture and storage; Public Spending; public debt; human capital; finance with debt; green energy; long-term fiscal sustainability; climate shock; debt sustainability; co2 emission; total factor productivity; increase in debt; high growth rate; higher interest rate; fiscal policy instrument; shadow wage rate; overlapping generations model; net foreign asset; value of capital; public investment spending; global temperature; capital stock; Risk-free interest rate; size of population; green energy production; determinants of growth; income tax cut; structure of production; supply chain effect; expansionary fiscal policy; elasticity of substitution; international financial market; first order condition; reallocation of investment; greenhouse gas emission; emission by sector; general equilibrium model; Boosting Growth; energy intensive manufacturing; interest rate level; long-term debt sustainability; determinant of capital; long run equilibrium; share of investment; high debt levels; possibility of default; income tax break; demand for energy; price of capital; investment adjustment cost; net present value; carbon tax revenue; low income nations; impact on productivity; Equilibrium Interest Rate; optimal capital stock; share of capital; low income group; demand for fund; human capital endowment; human capital level; capital per worker; domestic public debt; amount of knowledge; global temperature increase; unit labor; unit of labor; fiscal incentive; Learning and Innovation Credit



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Catalano,Michele Forni,Lorenzo

Fiscal Policies for a Sustainable Recovery and a Green Transformation (English). Policy Research working paper,no. WPS 9799 Washington, D.C. : World Bank Group.