Fiscal Policy for Climate Change

Fiscal policy offers a number of levers to reduce carbon emissions. Climate change mitigation can for example be implemented through carbon taxation on the production or consumption side, or through debt-financed public investments in emission-reducing infrastructure. Yet these various instruments may differ significantly in their cost-effectiveness in reducing emissions and in their distributional impacts among households. We develop a macroeconomic heterogeneous-agent model with environmental externalities to address both of these questions.