The macroeconomic effects of climate policy: A Keynesian point of view

  • Received July 16, 2022;
    Accepted September 7, 2022;
    Published September 14, 2022
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/ee.13(1).2022.02
  • Article Info
    Volume 13 2022, Issue #1, pp. 16-27
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The paper analyzes the effects of introducing a corporate carbon tax on GDP and the effectiveness of this macroeconomic policy. The study is based on constructing a simple Keynesian model with flexible prices. It shows that the carbon tax can have a double beneficial effect on the economy in addition to its favorable effect on the environment: i.e., an increase in GDP and employment. The initial values (y = 100; C = 60; I = 18; G = 16; g(A) = 6) was used to simulate a positive shock of the carbon tax T, increasing from 1.75 to 1.9. The paper considers three different cases depending on the low (Case 1), medium (Case 2), or high (Case 3) sensitivity of the marginal propensity to consume in response to an increase in the prices of goods. In addition, case 4 is considered: stimulus policy associated with climate policy; and case 5 is: policy to increase nominal wages. The results show that the carbon tax can lead to an increase in prices. Although the tax does not excessively negatively affect consumption, it has a positive effect on GDP via the increase in green investments and the induced increase in public spending. Households are, therefore, not necessarily penalized because they benefit from the multiplier effects of the increase in public spending due to the introduction of the ecological tax. Furthermore, stimulus policy is even more effective when combined with an emissions tax.

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    • Figure 1. Effect of an increase in the carbon tax on the economy (Case 1)
    • Figure 2. Effect of an increase in the carbon tax on the economy (Case 2)
    • Figure 3. Effect of an increase in the carbon tax on the economy (Case 3)
    • Figure 4. Increased public spending (with the budget deficit) while maintaining the carbon tax (Case 4)
    • Figure 5. Increase in public spending (with the budget deficit) coupled with an increase in the carbon tax (Case 5)
    • Table 1. Comparing results of the AS-AD model and the ‘Pure Keynesian’ model
    • Conceptualization
      Nicolas Piluso
    • Formal Analysis
      Nicolas Piluso
    • Investigation
      Nicolas Piluso
    • Supervision
      Nicolas Piluso
    • Writing – original draft
      Nicolas Piluso
    • Writing – review & editing
      Nicolas Piluso
    • Methodology
      Edwin Le Heron
    • Software
      Edwin Le Heron
    • Validation
      Edwin Le Heron
    • Visualization
      Edwin Le Heron