A Green-Golden Rule for Climate Policy

33 Pages Posted: 3 Feb 2025 Last revised: 14 Feb 2025

See all articles by Ottmar Edenhofer

Ottmar Edenhofer

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

Ulrich Eydam

University of Potsdam

Maik Heinemann

University of Potsdam

Matthias Kalkuhl

Potsdam-Institut für Klimafolgenforschung (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); University of Potsdam - Economics and Social Sciences

Nikolaj Moretti

Potsdam-Institut für Klimafolgenforschung (PIK); University of Potsdam - Economics and Social Sciences

Date Written: January 31, 2025

Abstract

Fiscal rules that limit government deficits address the problem of excessive public debt, but can have negative consequences for the provision of durable public goods. In a model with climate policy, we analyze the relationship between such deficit rules and emission reductions induced by climate policy. While deficit rules reduce excessive government debt, this comes at the expense of emission reductions. In contrast, a green--golden rule, inspired by the golden rule of fiscal policy, can induce both the efficient deficit and the efficient emission reductions. The rule links the admissible deficit to observed emissions or carbon prices and to the social cost of carbon. We illustrate admissible debt levels for a quantity- and a price version of the rule.
A cumulative decrease in emissions of 280 Mt CO2 between 2020 and 2030 would lead to an admissible cumulative deficit of around 160 Bn. Euro. Increasing the carbon price to 200 Euro/tCO2 in 2024 would grant additional fiscal space amounting to 0.3% of GDP per year to a government that could be spent unconditionally.
In comparison to the general golden rule, the green--golden version has decisive advantages when it comes to its practical implementation.

Keywords: Fiscal Rules, Climate Policy, Public Debt, Present Bias, Golden Rule of Fiscal Policy, Social Cost of Carbon

Suggested Citation

Edenhofer, Ottmar and Eydam, Ulrich and Heinemann, Maik and Kalkuhl, Matthias and Moretti, Nikolaj, A Green-Golden Rule for Climate Policy (January 31, 2025). Available at SSRN: https://ssrn.com/abstract=5119380 or http://dx.doi.org/10.2139/ssrn.5119380

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

Ulrich Eydam

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany

Maik Heinemann

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany

Matthias Kalkuhl

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

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

Torgauer Straße 12-15
Berlin, 10829
Germany

University of Potsdam - Economics and Social Sciences ( email )

Potsdam
Germany

Nikolaj Moretti (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

University of Potsdam - Economics and Social Sciences ( email )

Potsdam
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
67
Abstract Views
176
Rank
716,018
PlumX Metrics