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This paper uses a dynamic general equilibrium approach that takes into account the macroeconomic implications of the green transition and its consequences for public finances. It shows that when the government relies too heavily on expenditure-based measures, it threatens the sustainability of public debt, by increasing the probability of sovereign default, leading to higher interest rates on government bonds. This higher public default risk has potentially significant repercussions on investment financing conditions for the private sector, and increases the cost of the transition to a net-zero economy. On the other hand, carbon pricing policies make the transition more viable for public finances, at the expenses of similarly high economic costs, while remaining effective in reducing greenhouse gas emissions. The welfare-maximizing optimal policy mix results in a balanced approach, with the public sector’s contribution to the total mitigation effort increasing gradually, ranging from 25% to 40% between 2030 and 2050.
Working papers
Working papers
Sovereign debt sustainability, the carbon budget and climate damages
Sovereign debt sustainability, the carbon budget and climate damages
R&R, Environmental and Resource Economics. Swiss Finance Institute Research Paper No. 24-15, CEPR Paris Symposium 2023 Poster Session.
R&R, Environmental and Resource Economics. Swiss Finance Institute Research Paper No. 24-15, CEPR Paris Symposium 2023 Poster Session.
Climate risks present a substantial challenge to sovereign debt sustainability and fiscal space. The economic costs associated with mitigation efforts and physical damages can hinder growth, making sovereign debt repayment more difficult. An effective measure for capturing these phenomena is the so-called fiscal limit: the maximum debt-to-GDP ratio that can be sustained without incurring default risk. This paper calculates fiscal limits for 31 advanced economies under various transition scenarios. Three main results emerge from the analysis. First, the impact of greenhouse gas emission reductions, aligned with Paris Agreement carbon budgets, lowers fiscal limits in the short term. However, it does not generally determine whether a country shifts from sovereign debt sustainability to unsustainability, except when inefficiently managed for some high-debt economies, such as Italy. Additionally, the emission reduction trajectory depends on the objective of the government maximization programme (welfare vs. debt sustainability) and this affects fiscal limits. Finally, accounting for climate damages and global coordination in the transition appears critical. Without collective efforts to reduce emissions and mitigate climate damages, fiscal limits are projected to decline sharply over the long term for all countries, including those making successful transition efforts. These findings emphasize that the only viable path to maintaining sustainable debt is a global, collaborative, well managed, and timely transition.
The Macroeconomics of Climate Change and Public Debt Sustainability
The Macroeconomics of Climate Change and Public Debt Sustainability
Climate change and the low-carbon transition are increasingly shaping the macroeconomic conditions that underpin sovereign debt sustainability—namely, output growth, primary balances, and real interest rates. Mitigation policies entail short-term costs that may interact with debt sustainability constraints, while delayed climate action risks undermining long-term growth and eroding fiscal capacity. These dual pressures underscore the need for flexible and dynamic analytical tools capable of capturing compound risks to public debt. A growing body of literature has begun to integrate environmental risks into debt sustainability analysis, thereby expanding traditional macro-fiscal frameworks. Advancing climate-informed debt assessment is both an academic and political necessity that requires bridging the climate and fiscal literatures. This review aims to clarify this emerging field and provide a foundation for contributing to the intersection of climate and debt sustainability in macroeconomic modeling. The ability to design fiscally sustainable climate policies depends on it.
Under Pressure: Sovereign Debt Challenges in a Warming World, jointly with S. Dees and A. De Gaye
Under Pressure: Sovereign Debt Challenges in a Warming World, jointly with S. Dees and A. De Gaye
Work in progress
Work in progress
The Green Transition, Public Finances and Monetary Policy in an E-DSGE model, jointly with S. Dees
The fiscal limits of long-term debt
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