Fiscal Policy Choices around Climate Change

The Intergovernmental Panel on Climate Change has repeatedly raised the alarm about the increasing likelihood of the world missing the targets set in the 2015 Paris Agreement. The oil and gas sectors are making record profits, while fossil fuel subsidies remain in place. The International Energy Agency estimates that $1 trillion was invested in fossil fuels in 2023, compared to $1.7 trillion in renewables (including nuclear power). Given “carbon lock-in” and the need for new energy infrastructure (especially in advanced economies), the shift from fossil fuels to clean energy is vital. Since no global tax or cap is feasible, governments are reluctant to adopt carbon taxes or implement controls that could create a competitive disadvantage. This chapter provides an overview of the fiscal strategies of the three largest emitters – namely the United States, China, and the European Union – regarding the green transition. It examines the period 2010–2023 to assess how fiscal policy has evolved in response to the climate emergency. For each country or region, five key issues are addressed. First, we track reductions in greenhouse gas emissions to see if there is any correlation with the timing of policy initiatives, recognizing that multiple factors are at play, including the general shift from coal to natural gas. Second, we assess whether and to what extent fossil fuel subsidies have changed over the period, noting governments’ dependence on fossil fuel revenues. Third, we examine the scale of explicit expenditures, subsidies, or tax breaks for clean energy investments. Fourth, we ask whether taxes or a cap on emissions exist, and how these policies incorporate the true costs of carbon. Finally, we consider the implications of the green transition for fiscal policy and public debt, and seek to explain the political constraints shaping policy choices.