Mouez Fodha (PSE) – Mitigation, Adaptation, and Public Finance

Mouez Fodha


This article explores the interplay between public finance and investments in climate change mitigation and adaptation. Adaptation is funded by public revenues from taxation and public bonds, whereas households can invest in mitigation and receive subsidies. We show that adaptation and mitigation are substitutes or complements, depending on the level of economic development and fiscal policy decisions. In less-developed countries, adaptation and mitigation are complements (resp. substitutes), if the mitigation subsidy is low (resp. high). When the government is indebted, we show that increasing public spending to finance adaptation and/or mitigation could be beneficial for developed countries but could be detrimental for less-developed countries. Thus, we add a new argument to the debate on the optimal mix between adaptation and mitigation, namely, fiscal policy and the funding schemes of these investments.

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