## Public Debt Dynamics During the Climate Transition

_IMF Working Papers, March 29, 2024_

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## Bibliographic details
- Authors: Daniel Garcia-Macia, Waikei R Lam, Anh D. M. Nguyen
- Published: March 29, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400270635.001

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### Summary
- Managing the climate transition presents policymakers with a tradeoff between achieving climate goals, fiscal sustainability, and political feasibility, which calls for a fiscal balancing act with the right mix of policies.
- The paper develops a tractable dynamic general equilibrium model to quantify the fiscal impacts of various climate policy packages aimed at reaching net zero emissions by mid-century.
- Simulations compare policy mixes focused primarily on spending with mixes that include carbon-pricing and spending-based policies.

### Key findings
- Relying primarily on spending measures to deliver on climate ambitions will be costly, possibly raising debt by 45-50 percent of GDP by 2050.
- A balanced mix of carbon-pricing and spending-based policies can deliver on net zero with a much smaller fiscal cost, limiting the increase in public debt to 10-15 percent of GDP by 2050.
- Carbon pricing is central as an effective tool for emissions reduction and as a revenue source.
- Delaying carbon pricing action could increase costs, especially if less effective measures are scaled up to meet climate targets.
- Technology spillovers can reduce the costs of the transition.
- Bottlenecks in green investment could unwind the gains from technology spillovers and slow the transition.

### Model and scenarios
- Framework: Tractable dynamic general equilibrium model.
- Policy objectives: Reach net zero emissions by mid-century.
- Policy packages evaluated: Spending-dominant approaches; balanced mixes combining carbon pricing and spending; delayed carbon-pricing implementation; scenarios with technology spillovers and with green investment bottlenecks.

### Policy implications and recommendations
- Prioritize a balanced policy mix that includes carbon pricing alongside targeted spending to limit fiscal costs while achieving climate goals.
- Implement carbon pricing early to harness both emissions reductions and revenue generation, avoiding higher costs from scaling up less effective measures later.
- Support policies that enable technology spillovers to lower transition costs.
- Address potential bottlenecks in green investment to prevent loss of gains and slowdowns in the transition.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2024/03/29/public-debt-dynamics-during-the-climate-transition-546929_