Mitigation, Adaptation and Public Finance
Mouez Fodha (PSE)
The paper studies the impact of an environmental tax reform (ETR) when the government also taxes income, devotes public expenditures to environmental protection and faces constraints on debt issuing and public spending. We show that a rise in the environmental tax fosters the investment factor while reducing the income tax rate – necessary to maintain the spending and debt-to-output ratios. Moreover, this ETR produces positive effects on both the environment and consumption if public spending on environmental protection is large enough and the economy is on an under-accumulation path. We also show that these positive impacts of the ETR do not occur for the first generations, which questions the possible implementation of such a reform. This ETR can however yield a double-dividend for young and old at the long-run steady-state. Finally, if the increase in the environmental tax entails a lower debt-to-output ratio (the income tax being unchanged), consumption and environment are improved. This occurs provided that the debt-to-output ratio is not too high, public spending is high enough and the economy is on an under-accumulation steady-state path. Finally, we extend these conclusions by taking into account mitigation and adaptation expenditures simultaneously. The analysis of ETR in this context provides a better understanding of the complementary properties of these two strategies.