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Fiscal Policy and Ecological Sustainability: A Post-Keynesian Perspective

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Frontiers of Heterodox Macroeconomics

Part of the book series: International Papers in Political Economy ((IPPE))

Abstract

Fiscal policy has a strong role to play in the transition to an ecologically sustainable economy. This contribution critically discusses the way that green fiscal policy has been analysed in both conventional and post-Keynesian approaches. It then uses a recently developed post-Keynesian ecological macroeconomic model in order to provide a comparative evaluation of three different types of green fiscal policy: carbon taxes, green subsidies and green public investment. We show that (i) carbon taxes reduce global warming but increase financial risks due to their adverse effects on the profitability of firms and credit availability; (ii) green subsidies and green public investment improve ecological efficiency, but their positive environmental impact is partially offset by their macroeconomic rebound effects; and (iii) a green fiscal policy mix derives better outcomes than isolated policies. Directions for future heterodox macroeconomic research on the links between fiscal policy and ecological sustainability are suggested.

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Notes

  1. 1.

    Feed-in tariffs are long-term contracts, which allow green energy producers to receive a fixed payment for the electricity that they generate; these payments are independent of the market price of electricity.

  2. 2.

    Note that the carbon price derived by DICE and other IAMs is also compatible with cap-and-trade systems.

  3. 3.

    This price should increase by 3% every year.

  4. 4.

    For a more detailed comparison of the two models and their similarities and differences with the DICE model, see Bonen et al. (2014).

  5. 5.

    For detailed discussions of the use of CGE models in the analysis of environmental policies, see Bergman (2005) and Babatunde et al. (2017).

  6. 6.

    For a CGE model that permits imperfections in the labour market, see Capros et al. (2013).

  7. 7.

    For a detailed discussion of additional issues see, among others, Scrieciu et al. (2013), Farmer et al. (2015), van den Bergh and Botzen (2015) and Pollitt and Mercure (2017).

  8. 8.

    Of course, the magnitude of this effect on GDP depends on some potential capacity constraints that have to do, for example, with skills and geographical location.

  9. 9.

    This, in particular, relies on the concept of ‘ontological’ uncertainty, which is one of the two forms of fundamental uncertainty, the other one being ‘epistemological’ uncertainty. For the differences between ontological and epistemological uncertainty see Lavoie (2014, Chapter 2).

  10. 10.

    See, for example, Aldred (2012) on the importance of climate change uncertainty and its links with fundamental uncertainty à la Keynes.

  11. 11.

    For the stock-flow consistent approach to macroeconomic modelling, see Godley and Lavoie (2012), Caverzasi and Godin (2015) and Nikiforos and Zezza (2017).

  12. 12.

    For a discussion of the First and the Second Law of Thermodynamics and their implications for economics, see Daly and Farley (2011).

  13. 13.

    This disaggregation relies on ISIC (International Standard Industrial Classification of All Economic Activities) rev. 3.1. The ‘mining and utilities’ sector includes ISIC C (‘mining and quarrying’) and ISIC E (‘electricity, gas and water supply’), the ‘manufacturing and construction’ sector includes ISIC D (‘manufacturing’) and ISIC F (‘construction’), the ‘transport’ sector corresponds to ISIC I (‘transport, storage and communication’) and the ‘other sectors’ include ISIC A, B, G, H and J-P.

  14. 14.

    Available at: www.define-model.org.

  15. 15.

    Note that in the reference scenario of IRENA (2018, p. 41) the annual investment in renewables and energy efficiency over the period 2015–2050 is close to US$1.3 trillion. Recall that green investment in our model does not only include investment in renewables and energy efficiency; it also includes investment that improves material intensity and the recycling rate.

  16. 16.

    Other causes of climate-related transition financial risks include rapid green technical progress that might render carbon-intensive assets unprofitable and abrupt changes in environmental preferences.

  17. 17.

    Note that the effect of bank capital on bank lending, which is incorporated explicitly in our model, is in line with the recent empirical literature. The latter shows that changes in the capital adequacy ratio affect loan supply (see e.g. Aiyar et al. 2016; Gambacorta and Shin 2018).

  18. 18.

    This term was first used by Carney (2015).

  19. 19.

    For a description of the rebound effects, see Barker et al. (2009). Our analysis captures the macroeconomic aspects of these rebound effects since a rise in investment induced by a climate policy leads to higher economic activity that results in a rise in carbon emissions, waste and the use of energy and matter.

  20. 20.

    This is why we do not report the value of variables after 2110 in Fig. 2.

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Authors and Affiliations

  1. Department of Economics, SOAS, University of London, London, UK

    Yannis Dafermos

  2. Department of International Business and Economics, University of Greenwich, London, UK

    Maria Nikolaidi

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  1. Department of Land Economy, University of Cambridge, Cambridge, UK

    Philip Arestis

  2. University of Leeds, Leeds, UK

    Malcolm Sawyer

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Dafermos, Y., Nikolaidi, M. (2019). Fiscal Policy and Ecological Sustainability: A Post-Keynesian Perspective. In: Arestis, P., Sawyer, M. (eds) Frontiers of Heterodox Macroeconomics. International Papers in Political Economy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-23929-9_7

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