Event Details

British Academy CLIMADAP Economic Research Seminar

Abstract: "This paper studies the macroeconomic and environmental effects of public debt consolidation in the presence of climate change. We develop a New Keynesian DSGE model with climate externalities, disaggregated energy sectors, and differentiated public investment in green and dirty capital. The economy transitions from a high (90%) to a lower (75%) public debt-to-GDP ratio under two regimes: ad hoc fiscal rules and e optimized state-contingent policies following Schmitt-Grohe and Uribe (2007). We analyze each regime with and without climate-related productivity effects. Our findings show that long-run output and welfare gains from consolidation depend on the fiscal instrument used. Capital tax reductions yield the highest gains, while green public investment fosters clean energy with minimal fossil fuel use. During transition, carbon tax-based consolidation has milder short-run costs and stronger medium-run gains when climate damages are considered. Optimized policy mixes—including carbon taxes and spending cuts—enhance debt sustainability and the green transition, especially when climate externalities are internalized"