Climate Policies and External Adjustment

Rudolfs Bems, Luciana Juvenal, Weifeng Larry Liu and Warwick McKibbin

No 19350, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates would fall over time with increases in the carbon tax. These external sector effects, however, depend crucially on the degree of international policy coordination and credibility.

Keywords: Climate policies; Carbon taxes; Net-zero emissions; Current account; Capital flows; Dynamic general equilibrium model; G-cubed (search for similar items in EconPapers)
JEL-codes: F41 F42 H23 Q54 (search for similar items in EconPapers)
Date: 2024-08
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Related works:
Working Paper: Climate Policies and External Adjustment (2024)
Working Paper: Climate Policies and External Adjustment (2024)
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