Climate Policy and Optimal Public Debt
CESifo, Munich, 2021
CESifo Working Paper No. 8865
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.
Public Finance
Energy and Climate Economics