Anna Bartocci, Alessandro Notarpietro, and Massimiliano Pisani explore the impact of a green fiscal policy that is designed to address the impact of climate change on macroeconomy and monetary policy, focusing on the eurozone. The authors develop a green fiscal policy environment model which consists of representative green source in the energy mix of household consumption, a fiscal policy authority that levies taxes and subsidies on energy sources and issues sovereign bonds, and the central bank which conducts secondary market purchases of long-term sovereign bonds, which affects activity and inflation due to financial market segmentation.
The model is then put through three scenarios: first, a gradual increase in the carbon tax over 9 years; second, a fiscal policy mix involving an increase in the carbon tax, an increase in subsidies for green energy, and a reduction in labor income tax supported by households; and third, and environment of low interest rates (which limits the central bank’s flexibility to change interest rates).
The model simulation results highlight the recessionary and disinflationary effects of introducing a carbon tax. However, increasing energy subsidies and reducing labor taxes help mitigate these impacts. Additionally, a green fiscal policy under a low-interest rate environment can affect the effective lower bond rate prompting the bank to use non-standard measures such as the purchase of long-term sovereign bonds.
“Green” fiscal policy measures and nonstandard monetary policy in the euro area – ScienceDirect
