Green Fiscal Rules? Challenges and Policy Alternatives

Green Fiscal Rules? Challenges and Policy Alternatives
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Volume/Issue: Volume 2024 Issue 125
Publication date: June 2024
ISBN: 9798400280726
$20.00
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Topics covered in this book

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Exports and Imports , Economics- Macroeconomics , Environmental Economics , Natural Disasters , Public Policy- Environmental Policy , Fiscal rule , golden rule , medium-term fiscal framework , MTFF , Policy alternative , policy tradeoff , debt objective , PFM practice , green spending , Fiscal rules , Climate policy , Climate change , Natural disasters , Debt sustainability , Global

Summary

This paper studies the impact of green fiscal rules – designed to protect climate-related spending –on debt dynamics. Simulations of green rules that exempt green spending from the rule limits for an emergingmarket economy illustrate that they can lead to unsustainable debt dynamics when the net zero emissions goal is pursued mostly using spending-based instruments (e.g., investment and subsidies). Or the rule would need to implicitly assume a large fiscal adjustment in the non-green budget, which would undermine its credibility. It will be needed to build broad public consensus for a more comprehensive fiscal strategy that tackles the difficult policy tradeoffs that will be required and takes into account long-term effects. A more appropriate mix of climate policies, including actively employing carbon pricing, should be pursued within the overall setting of fiscal and debt objectives. Developing ‘green’ medium-term fiscal frameworks would help to integrate climate change considerations into fiscal policy design in a more comprehensive manner.