The fiscal implications of stringent climate policy

TL;DR

Implementing strict climate policies aligned with the 2015 Paris Agreement would significantly impact global fiscal systems, requiring substantial revenue measures, especially in poorer regions, but the challenge diminishes with relaxed emission targets.

Contribution

This paper quantifies the fiscal implications of stringent climate policies, highlighting revenue needs and regional disparities, which were previously underexplored.

Findings

Carbon tax revenue could reach 7% of GDP by 2050 under strict policies.

Subsidies for carbon sequestration could amount to 6.6% of GDP.

Fiscal challenges decrease if emission reduction targets are relaxed.

Abstract

Stringent climate policy compatible with the targets of the 2015 Paris Agreement would pose a substantial fiscal challenge. Reducing carbon dioxide emissions by 95% or more by 2050 would raise 7% (1-17%) of GDP in carbon tax revenue, half of current, global tax revenue. Revenues are relatively larger in poorer regions. Subsidies for carbon dioxide sequestration would amount to 6.6% (0.3-7.1%) of GDP. These numbers are conservative as they were estimated using models that assume first-best climate policy implementation and ignore the costs of raising revenue. The fiscal challenge rapidly shrinks if emission targets are relaxed.