Insights Blog

Fiscal Policies for a Low-Carbon Economy

August 17, 2020

The World Bank commissioned a team of New School economists to investigate fiscal policies that will help us move from a high-carbon economy to a low-carbon economy while minimizing financial instability.

The team is led by Professor Willi Semmler, Director of SCEPA’s Climate Change project, along with alumni and students of the New School for Social Research Economics Department.

The economists are focused on determining the best combination of carbon taxation and green bonds that will enable a smooth transition to low-carbon growth. Combining the two climate policies allows policymakers and private investors to benefit from:

  • Complementary interaction effects: carbon taxation increases the relative returns of green investments, improving the efficiency and decreasing the cost of green bonds, and can also lead to lower price volatilities of assets representing green investments.

  • Financing: carbon taxation alone cannot scale up and deliver the resources and incentives required to meet the challenge of climate protection.

  • Avoidance of stranded assets and stranded nations: economies are less exposed on the financial side to the risk of a future collapse of fossil fuel asset prices.

  • Expedited climate mitigation, lowered overall costs, and burden-sharing between current and future generations: the policy combination speeds up mitigation and increases welfare for current and future generations, while easing the burden on the current generation that comes with carbon taxation.

  • Overcoming financial investors’ and policymakers’ short-term focus: green bonds allow to make sustainable long-term investments needed to mitigate climate change. The lower volatility of returns from green investments, in contrast to fossil fuel investments, allows also for smoother portfolio returns.

The finished report will present a global overview on the current state of climate policies, including countries’ experiences in implementing carbon taxation and green bonds. It will also examine how these policies are discussed in macroeconomic models, and to what extent these models can be used to guide climate policy decisions. Finally, the report will present empirical evidence on the performance of green bonds and discuss a proper mix of carbon taxation and green bond issuance. Given the current stage of the business cycle, green investment can and should be scaled up due to low-interest rates and low bond yields.