A Public Finance Perspective on Climate Policy: Six Interactions that May Enhance Welfare

44 Pages Posted: 21 Apr 2015

See all articles by Jan Siegmeier

Jan Siegmeier

Technische Universität Berlin (TU Berlin)

Linus Mattauch

Mercator Research Institute on Global Commons and Climate Change (MCC)

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK)

David Klenert

European Commission-Joint Research Centre

Anselm Schultes

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: April 20, 2015

Abstract

Climate change economics mostly neglects sizeable interactions of carbon pricing with other fiscal policy instruments. Conversely, public finance typically overlooks the effects of future decarbonization efforts when devising instruments for the major goals of fiscal policy. We argue that such a compartmentalisation is undesirable: policy design taking into account such interdependencies may enhance welfare and change the distribution of mitigation costs within and across generations. This claim is substantiated by analyzing six interactions between climate policy and public finance that are insufficiently explored in current research: (i) reduced tax competition in an open economy, (ii) portfolio effects induced through climate policy, (iii) restructuring public spending, (iv) revenue recycling for productive public investment, (v) greater intragenerational equity through appropriate revenue recycling and (vi) intergenerational Pareto-improvements through intertemporal transfers. We thereby structure the hitherto identified interactions between climate change mitigation and public finance and show that jointly considering carbon pricing and fiscal policy is legitimate and mandatory for sound policy appraisal.

Keywords: Carbon Pricing, Taxation, Public Spending, Redistribution, Policy Interactions

JEL Classification: B41, H21, H23, H54, H60, Q54

Suggested Citation

Siegmeier, Jan and Mattauch, Linus and Franks, Max and Klenert, David and Schultes, Anselm and Edenhofer, Ottmar, A Public Finance Perspective on Climate Policy: Six Interactions that May Enhance Welfare (April 20, 2015). FEEM Working Paper No. 031.2015, Available at SSRN: https://ssrn.com/abstract=2596604 or http://dx.doi.org/10.2139/ssrn.2596604

Jan Siegmeier (Contact Author)

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

Linus Mattauch

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

David Klenert

European Commission-Joint Research Centre ( email )

Joint Research Centre, European Commission, Rue du
Brussels, Brussels 1050
Belgium

Anselm Schultes

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegraphenberg
Potsdam, Brandenburg 14412
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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