Modelling policy packages with combined climate, social, and macroeconomic goals : the Swedish case

Abstract

Backlashes to climate policy have raised the interest in policy packages that can simultaneously reduce emissions effectively, handle distributional effects, and reverse contemporary trends towards increased socio-economic inequalities. In this paper, we use Sweden as an example to study the effect of policy packages with combined climate, social, and macroeconomic goals. While Sweden has historically been considered a climate leader with a strong welfare state, income inequality has grown considerably. In recent years, the country has experienced a roll-back of climate policy, following debates concerning high fuel prices. Among the policy changes are reduced energy taxes on gasoline and diesel. We use the macro- econometric model E3ME, combined with micro-data for different income groups, to compare the effects of the reduced fuel taxes with other policy measures, using a similar fiscal amount. Results show that income support can compensate for high fuel prices more efficiently, while avoiding increased emissions. We further compare the effects of policy packages that combine a raised fuel tax or a progressive tax with recycling schemes. Fuel tax packages with recycling to dividends, green subsidies and public welfare can improve mitigation significantly, compensate for distributional effects, and have beneficial effects on the economy. Using a progressive tax to finance green subsidies and public welfare can combine mitigation with reduced income inequality, enhanced employment and economic growth. In both cases, deficit funding of green investments enhances policy performance. Key policy insights Income support is more efficient than a reduced fuel tax in order to compensate households for increased fuel costs, avoiding increase in emissions, but with equal or enhanced effects on GDP and employment. Combining fuel taxes with recycling to dividends, green subsidies or public welfare can increase mitigation considerably, avoid undesired distributional effects, and maintain or enhance employment and economic growth. Using progressive taxation to finance green subsidies as well as spending on public welfare can combine mitigation with reduced income inequality, enhanced employment and economic growth.