Fiscal and Environmental Sustainability: Is Public Debt Environmentally Friendly?

Matilda Baret and Maxime Menuet
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Matilda Baret: Université d’Orléans

Environmental & Resource Economics, 2024, vol. 87, issue 6, No 8, 1497-1520

Abstract: Abstract This article assesses the dilemma that most governments face when seeking to ensure the sustainability of their public finances through economic growth while simultaneously protecting the environment. We propose a growth model in which the government finances abatement-spending through taxation or public debt and which follows a fiscal rule that targets the long-run debt-to-GDP ratio. We show that there is a threshold for the debt ratio below which debt and environmental sustainability are secured. In steady state, the debt ratio exerts a nonlinear effect on environmental quality in the form of an inverted U-shaped curve, and the environmental tax is good for the environment when public debt is not. A fiscal rule authorizing a small but strictly positive debt ratio could help the government to implement adaptation policies for environmental protection while supporting long-run economic growth.

Keywords: Growth; Environment; Public debt; Environmental tax (search for similar items in EconPapers)
JEL-codes: E62 H63 O44 Q58 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10640-024-00847-0

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