The Political Economy of Fiscal Climate Policy

• In Event: Political Economy of Environmental Policy

Abstract

In the early 2020s, numerous governments across the OECD significantly increased their fiscal climate policies. Carbon prices saw substantial rises, and green public expenditures reached new heights. This shift in fiscal policy towards green initiatives is puzzling. It occurred three decades after government’s initial promises to combat climate change made at the 1992 Rio Earth Summit and over 15 years following the advocacy by experts and activists for such policy changes. Moreover, this shift has been uneven across countries. For instance, the UK and Switzerland have implemented relatively high carbon prices with limited spending. In contrast, countries like South Korea and the US combine substantial climate spending with little effective carbon pricing. Yet, in other countries, predominantly in the EU, governments have explicitly linked climate spending to carbon pricing policies. Lastly, some nations, like Australia, have fallen behind in both spending and pricing. This paper probes two questions: What accounts for this abrupt increase in fiscal climate policies? And what explains the differences in policy tools across countries? To address these questions, the paper introduces the Fiscal Climate Policy Database, which merges new data on climate spending from the 2024 budgets of OECD countries with existing carbon pricing policy data. Utilizing this unique dataset, the paper reveals that the emergence and variance of fiscal climate policies across countries reflect key aspects of each country's political economy, including their industrial composition and economic growth model. The paper asserts that a country's dominant economic sectors and interests substantially shape the extent and approach it adopts in redirecting financial flows towards the green transition. Overall, the paper encourages climate policy researchers to give more attention to countries’ macroeconomic foundations, and it also prompts political economists to regard climate policy as a significant site of distributive economic conflicts.

Author

• Nils Kupzok, Johns Hopkins University School of Advanced International Studies