IMF Working Papers

Green Fiscal Rules? Challenges and Policy Alternatives

Author/Editor:

Francesca Caselli ; Andresa Lagerborg ; Paulo A Medas

Publication Date:

June 21, 2024

Electronic Access:

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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.

Series:

Working Paper No. 2024/125

Subject:

Climate change Climate policy Debt sustainability Environment External debt Fiscal policy Fiscal rules Fiscal stance Natural disasters Public debt

Frequency:

regular