David Klenert

Distributional Effects of Public Investment when Wealth and Classes are Back

In developed economies, wealth inequality is high, while public capital is underprovided. Here, we study the impact of heterogeneity in saving behavior and income sources on the distributional effects of public investment. A capital tax is levied to finance productive public capital in an economy with two types of households: high income households who save dynastically and middle income households who save for retirement. We find that inequality is reduced the higher the capital tax rate is and that low tax rates are Pareto‐improving. There is no clear‐cut trade‐off between efficiency and equality: middle income households’ consumption is maximal at a capital tax rate that is higher than the rate which maximizes high income households’ consumption.

Infrastructure and Inequality: Insights from Incorporating Key Economic Facts about Household Heterogeneity

We study the trade-off between equity and growth in the context of tax-financed investment in public capital. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. In contrast to the results of studies that introduce heterogeneity through different initial endowments only, we find that under our heterogeneity assumptions an equity-efficiency trade-off does not necessarily occur. We show that a consumption tax or a capital tax, levied to finance public capital, does not increase inequality. In our model capital tax-financed public investment has even an inequality-reducing effect - thus allowing for Pareto-improving public investment that decreases inequality. Additionally we find that agents differ in their preferred tax rates. These results are valid for both, the case of endogenous growth and the case of steady state convergence and do not require the assumption of an identical rate of pure time preference across all households.

The fiscal benefits of stringent climate change mitigation: an overview

ABSTRACT The Paris Agreement’s very ambitious mitigation goals, notably to ‘pursue efforts’ to limit warming to 1.5°C, imply that climate policy will remain a national affair for some time. One key obstacle to very ambitious national mitigation is that some policy makers perceive this to be in competition with major goals of fiscal policy, such as public investment or debt reduction. However, climate policy may actually contribute to these other objectives. Importantly, many fiscal implications of substantial carbon prices, which are essential for stringent mitigation targets such as the 1.5°C goal, have long been neglected by economic analyses of climate change mitigation. We systematically review recent contributions on interactions between climate policy and public finance, which include many topics beyond the classic `double dividend’ of environmental tax swaps. We can thus identify new conclusions about climate policy designs that may overcome fiscal objections and research gaps. We find that national climate policy often aligns with other objectives, provided that climate policies and fiscal policies are integrated well. A first class of interactions concerns public revenue-raising: carbon pricing can replace distortionary taxes and alleviate international tax competition; climate policy also changes asset values, which impacts the base of non-climate taxes and boosts productive investment. Second, they concern public spending, which needs to be restructured as a part of climate policy, while carbon pricing revenues may be recycled for public investment. Third, distributional impacts of climate policies include changes to household expenditures, to asset values and to employment; balancing them often requires fiscal policies. Our findings underline that jointly considering climate policy and fiscal policy can help to make substantial mitigation politically feasible. Key policy insights Climate policy, even under a very ambitious 1.5°C target, may substantially contribute to fiscal objectives, interact with fiscal policies, and lower mitigation costs. Mutual effects concern taxation, aggregate investment, public budgets, infrastructure and fiscal instruments with distributional effects. Better integrating climate policies and fiscal policies increases efficiency and supports political feasibility of very ambitious mitigation. This requires a common understanding of policy makers and academics on the most relevant interactions, based on more exchange and empirical research.

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

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.

Making carbon pricing work for citizens

The gap between actual carbon prices and those required to achieve ambitious climate change mitigation could be closed by enhancing the public acceptability of carbon pricing through appropriate use of the revenues raised. In this Perspective, we synthesize findings regarding the optimal use of carbon revenues from both traditional economic analyses and studies in behavioural and political science that are focused on public acceptability. We then compare real-world carbon pricing regimes with theoretical insights on distributional fairness, revenue salience, political trust and policy stability. We argue that traditional economic lessons on efficiency and equity are subsidiary to the primary challenge of garnering greater political acceptability and make recommendations for enhancing political support through appropriate revenue uses in different economic and political circumstances.Ambitious carbon pricing reform is needed to meet climate targets. This Perspective argues that effective revenue recycling schemes should prioritize behavioural considerations that are aimed at achieving greater political acceptance.