Debt, tax and environmental policy

Dette, taxe et politique environnementale

Mireille Chiroleu-Assouline and Mouez Fodha

PSE-Ecole d'économie de Paris (Postprint) from HAL

Abstract: This article examines the relationship between environmental policy and budgetary and fiscal policy. An undeniable obstacle to the implementation of environmental policies is their financing. First, the effectiveness of standard environmental instruments is assessed according to public economics criteria, notably distortions, externalities, welfare and macroeconomic aggregates. Limitations regarding acceptability and inequalities are also considered. Compared to quotas and standards, taxation offers significant advantages in incentivising more virtuous behaviour, but also in raising revenue for the State. If the objective of the tax is limited to pollution control, the recycling of revenues is a powerful tool for the correction of its undesirable effects. However, in the case of excessive debt, the revenue from the tax can also be used for the repayment of public debt. The interaction between environmental taxes and public debt is then examined. Repaying the debt using the revenue from the environmental tax restores budgetary room for manoeuvre. Symmetrically, if the debt level is acceptable, financing pollution policies through debt without increasing the tax burden is an interesting option. Debt should, however, be used sparingly and only in cases where the technology used to reduce pollution is highly effective. Finally, the environmental vulnerability of transition and climate-change related countries leads to a risk premium on their sovereign debt, thus increasing the cost of public debt and making the poorest countries even more vulnerable. By reconciling budgetary and environmental objectives, debt relief for developing countries could be an aid to these countries in their fight against pollution.

Keywords: Environmental policy; Tax; Debt; Politique environnementale; Taxe; Dette (search for similar items in EconPapers)
Date: 2023-08
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Published in Revue Française d'Economie, 2023, XXXVIII (1), pp.55-106. ⟨10.3917/rfe.225.0055⟩

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Working Paper: Debt, tax and environmental policy (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-04181981

DOI: 10.3917/rfe.225.0055

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